Interest rates have been on an upward trajectory with the increase in repo rates — the rate at which banks borrow from the central bank — by the Reserve Bank of India (RBI). The key benchmark lending rate has risen significantly by 190 bps over the last six months since the bottom of 4 per cent in April 2020. The good news is that fixed deposit rates have also gone up, though not in proportion to lending rates, over this period.
Here is a comparison of how leading banks are offering interest rates on fixed deposits:
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According to online marketplace for loans Paisabazaar, HDFC Bank, ICICI Bank, Axis Bank and SBI Bank are offering interest rates of 6.1 per cent on the one-year deposit. ICICI Bank hiked its FD rate on October 29 by 30 bps from 5.80 per cent bringing it at par with peers. However, for a three-year deposit, HDFC Bank is giving the higher interest at 6.25 per cent followed by ICICI Bank at 6.20 per cent with SBI and Axis Bank offering 6.10 per cent interest rate. In the case of a 5-year deposit, ICICI Bank leads the race with a 6.35 per cent interest rate compared to the 6.25 per cent offered by HDFC Bank and 6.10 per cent offered by Axis Bank and SBI.
How banks are offering FD rates/Design: Pragati Srivastava
Rates are, however, expected to go up further due to the widening credit-deposit growth gap, especially since the rate hike does not seem to have impacted the credit off-take. Take, for instance, for this fiscal so far (April-June), the credit-deposit ratio is at 73.5 per cent, compared to 70.5 per cent a year ago. RBI will hold an additional Monetary Policy Committee meeting on November 3.
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Bank deposits or mutual funds?
Though FD rates have risen recently it has always been a matter of debate on whether bank deposits are still the preferred choice of instrument for financial savings. According to a research report by Bank of Baroda, with a changing financial landscape, volatility in the interest rate regime and increasing risk-taking appetite, there tends to be a change in the pattern of deployment of financial savings. RBI’s recent report on financial assets of households shows that there has been a shift in the pattern where mutual funds and equity witnessed a sharp increase in FY22 with shares of 6.3 per cent and 1.9 per cent in overall financial assets respectively (the ratio was 2.6 per cent and 1.1 per cent in FY20), while the share of bank deposits declined to 25.5 per cent in FY22 from 34.4 per cent in FY20.
The report points out that debt funds are clearly not substitutes for bank deposits, but equity and other funds are gaining favour progressively. This is shown both in terms of growth in time deposits and AUM of mutual funds as well as share of bank deposits in combined funds. According to the report since FY16 (till Sep-22), total bank deposits have shown an accretion of Rs 77 lakh crore. Within that, term deposits have increased by Rs 66 lakh crore. A secure interest rate regime and risk averse sentiment have worked in favour of garnering bank deposits at a faster pace. On the other hand, net AUM of mutual funds rose by Rs 26.1 lakh crore, in the same period. Most of the mobilisation was in equity funds, which increased by Rs 10.8 lakh crore. Debt funds rose at a much slower pace of Rs 4.8 lakh crore. The balance was from ‘others’ component which comprises hybrid schemes among others.
