Bank FD rates may rise even further

MUMBAI: Bank fixed deposits (FDs) have got their zing back. Whether you are a taxpayer or a non-taxpayer, FD rates are now becoming attractive, having already crossed the 9% level. But they may rise further, what with the Reserve Bank set to raise interest rates once again on January 31.

Experts are predicting a raise of at least 0.25% shortly.

So are high FD rates come to stay? If you were to ask the banks themselves, you may get divergent answers.

A look at the varying tenures they offer for the top rate of 9% tells a story by itself. The minimum length ranges from 500 days (for Karur Vysya Bank, which offers 9.25%) to over five years (Corporation Bank).

But even banks offering the longest tenures seem to be saying that the high rates won’t be offered for too long.

The State Bank of India and the State Bank of Mysore are offering the 9% interest rate till March 31, 2007. Corporation Bank is also offering the higher rate for a limited period.

Interestingly, none of the big foreign banks - Citibank, HSBC or Standard Chartered - has been willing to raise rates anywhere near 9%. Does this mean they hold different views on how long the liquidity crunch will last?

“The tenors of deposits depends on competition rather than scientific logic. Banks also take into account the gaps across their tenors. But most of the deposits are more than one year, which gives banks enough liquidity,” says Anand Bowmick, senior director, banking, at rating agency Fitch.

Another reason for the varying maturity periods is that banks have to bring their assets and liabilities into sync. “The tenor of the deposits also depends on the asset liability management of the banks. In order to manage deposits they may raise asserts of the same tenure,” said Rajesh Mokashi, executive director, CARE ratings.

For senior citizens the rate being offered is 0.25% to 0.75% higher. Corporation Bank, as a part of its centenary year celebrations, is offering senior citizens an annual interest rate of 9.75% for deposits of five years or more.

A senior citizen, as per the Income Tax Act, is an individual who 65 years of age or more.

Senior citizens do not need to pay any tax if their income is less than or equal to Rs 185,000 per annum. Since interest on FDs is taxable, what this means is that at an interest of 9.75%, they can invest up to Rs 18.97 lakh to earn tax-free income.

Banks are obviously feeling the heat from other investment options and, by offering higher rates on a few specific tenors, they are trying to woo the general public back to FDs.