Nine to ten per cent interest rate on bank's FD is certainly appealing compared to investment in stock market. Element of tax concession on bank FD is attracting young investors, which was not possible in the low interest regime some year back

It was the understanding on government and Reserve Bank Of India’s (RBI) part that growth needs to be sacrificed, demand in economy has to be brought down and credit offtake from banking sector has to be brought down substantially from 25-26 per cent credit offtake growth of last year in order to save this economy, which is looking fragile due to rising inflation. Battling the war on inflation has forced RBI to squeeze liquidity from banking system and make credit availability tough for the market. Banks have responded to the RBI’s action positively and now these steps have seemingly pushed India into the high interest regime.


At this juncture when interest rate in economy is hitting the roof, it is time for both the spendthrift and the people who are in habit of cutting down their expenditure to save for future, to rejoice. Sensing cash crunch in near future when CRR hike of 25 basis points will be effective from August 30; banks are now luring the investors by offering high deposit rates on its fixed deposit (FD), which were looking impossible in low interest regime some one year back.

Yes, now the bank deposits are back in action. The age-old hassle-free investment method now looks very attractive as the return from the bank’s fixed deposit is effectively comparable to stock market return. In short term when stock market sentiments are not so upbeat fixed deposit has brought some respite for the investors.


The country’s largest bank, State Bank of India (SBI), by announcing interest rate hike yesterday, by 25 to 75 basis points (100 basis points = 1%) has brought stiff competition among banks as to who will eat the bigger pie of the fixed deposit in country. SBI has offered interest rate of 8.5 per cent (from 8.00 per cent) for a fixed deposit as low as six months upto one year duration and its offering of 10 per cent (up from 9.5%) interest on a fixed deposit of more than one year up to three years looks attractive.


Five years interest rate of 9.25 per cent though looks little less appealing, but internal calculations and keeping in view the tax concession available on banks’ fixed deposit of five years, this will work out to be 14.75 per cent per-tax return. But catch is there, the bank’s deposit of five years is qualified for tax concession under 80 C limit of Rs 1lakh only. So, if your investment in provident fund, insurance, mutual fund, children’s education already exceeds Rs 1 lakh then you can not have the tax benefit of five years bank fixed deposit.


Still for youngsters whose investment under 80C usually falls below Rs 1lakh, it is right time to keep some deposit in banks’ fixed deposit. This is all the more important because interest rate in any economy behaves like a cycle and if short-term interest rate is looking high then the situation may come when the cycle may turn up into low interest rate regime. It is better to lock your yield when you are getting such a high interest rate of say 9-10 per cent.
The interest rate for one year fixed deposits from various other banks is also falling in ranges between 9.25 percent to 9.50 percent but, sometimes banks are offering the rate not on yearly basis, rather they give it for 400 days or so, which is certainly more than a year and depositors have to keep the deposit of the bank for additional one month or so. In this case depositors should calculate what the effective rate is for one year or two years.