Savers rejoice, spenders beware

MUMBAI: It is the best of times for savers and the worst of times for borrowers. Fixed deposits (FDs), the long-favoured investment avenue of the great Indian middle class, is back in favour. In mid-2004, the interest on a one-year FD had fallen as low as 2.75%. But today, FDs have become an attractive investment proposition again (see table on p16). Those really at an advantage are senior citizens. With FD rates almost hitting double digits, they can deploy their hard-earned money to earn a decent rate of interest.

A senior citizen, according to the Income-Tax Act, is an individual who has completed the age of 65 years during the financial year. Senior citizens do not need to pay tax if their income is less than or equal to Rs1,85,000. Since interest on FDs is taxable, this means, at an interest rate of 9.75%, investment of up to Rs18.97 lakh can be made tax-free. If the interest earned exceeds that limit, the amount can be invested in tax-saving fixed deposits and a deduction of up to Rs1 lakh can be availed under section 80C of the Income-Tax Act.

Although senior citizens are having a good time, the younger lot can anticipate tougher times ahead, at least as far as borrowing is concerned. The average age of a person taking a home loan these days is early thirties.

With home loan rates going up, borrowers have seen their equated monthly instalments rise. ICICI Bank recently raised interest rates on its home loans by 1 per cent, leading to floating rate home loans touching the range of 10.5-10.75 per cent. This has led to EMIs increasing across the board (see table 2).

The rising rates have left individuals considering a home loan confused. “Should I take a loan right now or wait for interest rates to cool down”, is an oft-repeated question these days. The experts have conflicting advice to offer.

“Home loan rates have not peaked yet,” said Ashvin Parekh, partner and national leader, Global Financial Services with Ernst & Young. “As the central bank increases the interest rate, home loan rates are bound to rise. We’ll see more home loan hikes this year as the demand is just not subsiding. Rising income is making people go for it.”

But not everybody seems to agree with this. “Loan rates have started to peak now,” said Robin Roy, principal consultant with PWC. “With ICICI Bank, the most aggressive player, increasing its rates by a 100 basis points, one can say that home loan rates are seeing the higher end of a rise. However, we’ll have to look at further changes in other rate triggers such as the repo rate, changes in the SLR, and also perhaps the risk weights on loans.”

Roy said other factors to consider include inflation numbers. “The issue is that all people do not seem to be overly perturbed by an increase in the rates,” he said. “Banks are ready to extend the tenure for their repayments, which is making it easier for the individual borrower.”