BackShort-term FD rates up; should you invest?
Compare returns with other short-term products, but stick to FDs if safety is high on your agenda
Premium
Recently, some prominent banks increased the interest rates for short-term deposits of up to a year. Banks including HDFC Bank Ltd, Yes Bank Ltd, Axis Bank Ltd, IDBI Bank Ltd and Oriental Bank of Commerce (OBC) have raised the rates in the range of 50 basis points (bps) to 400 bps. One bps is one-hundredth of a percentage point. So should you consider short-term deposits?
New deposit rates
HDFC Bank has raised its deposit rates by 75-100 bps for deposits between 15 days to one year. Yes Bank has revised its deposit rates by 25 bps to 50 bps for select tenors. Axis Bank has increased deposit rates (above 1 crore) by 400 bps to 8% for the 15-day to 29-day tenor. OBC has raised fixed deposit rates by up to 75 bps across select maturity periods. Term deposits of OBC maturing between 91 days and 179 days is up to 8.50% from 7.75%. For deposits maturing between 270 days to less than one year interest rate has been increased to 8.50% from existing 8.25%. Term deposit maturing in 180-269 days would earn 8.50% from existing 8%. Deutsche Bank raised deposit rates by up to 150 bps offering 8.50% on 100 days and 101 days to 180 days buckets. IDBI Bank increased the rate of deposits with a maturity of 46 days to 200 days to 8.5%, effective 16 August.
Why have rates risen?
When there is liquidity tightening in the financial system, bank tends to raise interest rates on short-term deposits. Says Abhishek Kothari, a Mumbai-based banking research analyst, “Currently, liquidity is tight. Also banks’ cost of fund for the short-term period has increased. There is a need for deposit mobilization currently in the market. Considering that rates in certificate of deposits are high, it makes sense for banks to get money at lower rates from retail investors."
How long will the rates remain high? Says Kothari, “Rates will remain at this level for a couple of months especially till the festive season."
Effect on lending rates
Says Adhil Shetty, CEO and founder, BankBazaar.com, a banking portal, “Deposit rates have increased so you can potentially expect lending rates to shoot up too. So loans will also become expensive."
So far banks including HDFC Bank, Kotak Mahindra Bank Ltd and Yes Bank have increased their lending rates.
What should you do?
If you plan to invest for the short term, you should compare short-term deposit rates with the rates offered by some other short-term market instruments.
Says Suresh Sadagoppan, a Mumbai-based financial planner, “Considering that certificates of deposit (CDs) and commercial paper (CPs) rates have gone up, it is obvious that rates of ultra short-term fund will also rise as their underlying assets are CDs and CPs. So ultra short-term will be able to give at least 100-200 bps more than any banks short-term deposit."
If there is an external market shock, there could be single day negative returns on your ultra short-term fund as seen in July. These funds portfolio works on accrual basis, which means it shows notional loss (mark-to-market) and not actual loss. So if you stay invested, you may get the returns that you expected from the ultra short-term funds. But if safety is high on your agenda, stick to FDs.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
