Even as the sharp cut in RBI policy rate to 4.4 per cent — lowest in at least 20 years (4.75 per cent between April 2009 to February 2010) — will bring relief to borrowers, depositors and savers may now have to contend with post-tax returns of below 5 per cent on their fixed deposits (FDs) and in some cases just 4 per cent.
Led by State Bank of India, which slashed its deposit rate to 5.7 per cent on FDs of 1-10 year tenure along with cutting its lending rates, most large banks’ FD rates are likely to slide below 6 per cent on term deposits of more than one year duration, banking industry sources said.
Their could now be limited attractive avenues for conservative investors, looking for monthly interest income on FDs, to safely park their surplus funds. While small savings schemes offered by the government, GoI bonds and tax-free bonds offer an alternative for higher returns, they are less liquid than bank FDs which come with premature withdrawal facility. Another options available is fixed income funds.
While SBI already cut its lending and deposit rates, many private banks will have their asset liability committee meeting this week and are set to cut FD rates. Small lenders, such as Jana Small Finance Bank and AU Small Finance Bank, and NBFCs, like Bajaj Finance and HDFC, offer interest rates that are higher by about 1-2 percentage points when compared with large commercial banks.
“AAA-rated NBFCs are in the process of slashing deposit rates further starting April. They are expected to slash rates by 50-100 basis points,” an official with a leading non-banking financial company (NBFC) said.
However, it will be difficult for small banks and NBFCs to raise deposits easily as the perception of deposits being safe have taken a hit after troubles at PMC Bank and Yes Bank.
For a fixed deposit of 1-2 years and 5-10 years, HDFC Bank offers interest rate of 6.15 per cent. On a deposit of 2 years 1 day to 3 years, it is 6.25 per cent. ICICI Bank’s rates vary from 6.2-6.4 per cent for term deposit between 1-10 years. These rates are for deposits up to Rs 2 crore. Most banks offer an additional 50-bp interest to senior citizens.
With inflation falling and possibility of economic growth sliding further, it is unlikely that the market interest rates will rise anytime soon. Collapse in commodity prices, such as oil and metals, also mean the inflation will remain lower in the medium term. While low inflation would mean high real return on fixed deposits, still the fall in rates is sharp from a depositors perspective.
What should you do?
With equities turning volatile, debt funds witnessing risk on account of defaults by companies and FD rates falling, experts say these are times to preserve capital. However, investors can consider other options such as GoI bonds, tax-free bonds and debt mutual funds.
Mumbai-based financial planner Vishal Dhawan said debt funds with high quality securities are a good option and are more tax efficient too. “There are pockets of opportunity available — GoI bonds offering around 7.7 per cent, tax free bonds in secondary market (5.5 per cent post tax) and debt mutual funds,” he said.
“It is a new paradigm, everyone is trying to understand the unknown. While investors should stick to their asset allocation, they must make sure that money needed in the next two to three years is in safe liquid instruments. In the meantime, investors should look to stay with good quality debt securities and on the equity side with large caps only,” said Surya Bhatia of Asset Managers.
As FD returns are falling and SBI is offering 5.7 per cent — post-tax return of 4 per cent for someone in the highest tax bracket— fund managers feel that fixed income schemes are better for investors.
In a recent note, ICICI Prudential AMC said that since yields can soften further, debt funds can generate better returns. Some reasons that the fund house noted for moderation in yields include RBI’s continued accommodative stance; spread over repo still attractive for G-Sec and corporate bonds; RBI’s measures like LTRO, CRR cut and cutting reverse repo rate by 90 bps that should nudge banks to participate more in secondary market; more rate cuts due to slowdown in growth and low inflation; among others.
The fund house said, “The complete fixed income space looks attractive, as in the coming weeks you will see further softening of yields and there is opportunity to lock-in your investments at current elevated levels.”
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