The interest rates on your bank fixed deposit are dropping further…

Reasons for this is :
 

1. Primarily, there’s excess liquidity in the system. According to the Reserve Bank of India (RBI), surplus liquidity in March 2017 was to the tune of Rs 4.8 lakh crore (though down from the peak of Rs 7.9 lakh crore in January 2017).
    
2. Further, credit growth in the economy post-demonetisation has been rather tepid. The outstanding credit of all Scheduled Commercial Banks (SCBs) has dropped to Rs 2.5 lakh crore in the fortnight ended April 14, 2017.
    
3. Banks aren’t finding much prudence in holding on to high cost deposits, as borrowing rates too have come down.
    
4. Many banks are offering a higher rate of interest on saving bank accounts; to balance this, reducing deposit rates seems warranted.
    

State Bank of India (SBI) — the country’s largest public sector lender — has reduced its term deposit rates by upto 50 basis points (bps) for medium to longer maturity buckets for an investment amount below Rs 1 crore owing to this scenario.

Thus now, a 2-year to less than 3-year term deposit (or FD) with SBI offers a ‘non-senior citizen’, a rate of interest @ 6.25% p.a. vis-à-vis 6.75% p.a., and if you’re a ‘senior citizen’, a 50 bps more i.e. 6.75% as against 7.25% for the said tenure.

With this many other public sector and the private sector banks are likely to follow suit.
  Bank Fixed Deposit Rates

Banks	1-Yr (%)	2-Yr (%)	3-Yr (%)	> 5-Yr (%)
State Bank of India	6.50	6.25	6.25	6.25
Canara Bank	6.90	6.90	6.90	6.90
Central Bank of India	6.60	6.50	6.50	6.50
Bank of India	6.90	6.85	6.70	6.70
Bank of Baroda	6.90	6.90	6.90	6.50
Dena Bank	6.90	6.90	6.90	7.00
ICICI Bank	6.90	6.75	6.75	6.50
HDFC Bank	6.90	6.00	6.00	6.00
Axis Bank	7.00	6.75	6.75	6.75
HSBC Bank	5.00	6.50	5.00	5.00
Kotak Bank	6.75	6.50	6.25	6.00
Yes Bank	7.10	7.10	7.10	7.10

As on May 2, 2017 for deposits less than Rs 1 crore
(Source: websites of respective banks, PersonalFN Research)
In fact, Canara Bank was the first to take cue, announcing a 10 bps reduction in rates for 1-year FD rate. Likewise, Bank of Baroda has reduced rates by 10 to 25 bps across maturities. And among the private sector ones, Axis Bank revised its deposit rates to lower.

So, it’s perceptible that banks are worried about their Net Interest Margins (NIMs).

In such a scenario where should a risk-averse person invest?

The Government has reduced rates on Small Saving Schemes (SSS) viz. Public Provident Fund (PPF), Kisan Vikas Patra (KVP), and Sukanya Samriddhi Yojanaby 10 bps recently, yet they are visibly higher compared to bank FDs.

This provides you with an opportunity to invest in SSS; however, not all of these are tax efficient. Barring Sukanya Samriddhi Yojana (which can help you plan for your daughter’s future needs: higher education and marriage), and Public Provident Fund (which can contribute towards living a blissful retired life) not all enjoy an E-E-E (Exempt-Exempt-Exempt) status. Meaning, the interest earned on many other small saving instruments viz. NSC, KVP, POMIS, POTD, SCSS, etc. is taxable.

Hence, broaden your horizon and consider investing in debt mutual fund schemes to earn relatively better tax-adjusted returns. But adopting a sensible approach is the first step. Pay attention to the interest rate cycle while investing in debt mutual funds. Remember, not all debt mutual fund schemes are befitting across interest rate cycles; there is risk involved.

In the current scenario, where RBI has changed its monetary policy stance from ‘accommodative’ to ‘neutral’, a right to even increase policy rates is reserved if inflation pops it ugly head. Hence, first selecting the category of debt mutual funds becomes crucial.

PersonalFN is of the view that, investing at the longer end of the yield curve could prove imprudent. To put it simply, investing in long-term debt fund holding longer maturity debt papers can be perilous, since most of the rally has been captured already at the longer end of the yield curve and there’s not much steam left. Instead, you’ll be better-off if you deploy your hard-earned money in short-term debt funds; but ensure you’re giving due importance to your investment time horizon and asset allocation.

For an investment horizon of upto 2 years, consider investing in short-term debt funds.

If you have an investment horizon of 3 to 6 months, ultra-short term funds (also known as liquid plus funds) would be the most suitable.

And if you have an extreme short-term time horizon (of less than 3 months), you would be better-off investing in liquid funds.

If you need research backed recommendations to select the best debt mutual fund schemes for your portfolio, opt for PersonalFN's DebtSelect research reports. Our superlative guidance will certainly help you on the path to wealth creation. You can be rest assured about the ethical and unbiased nature of this service.

To define the most appropriate asset allocation and/or to rebalance your portfolio in the interest of your long-term financial wellbeing, reach out to a Certified Financial Guardian in your vicinity, who is a mark of trust and respect.
 

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