Institutions to make most of rate party

MUMBAI: The party with double-digit deposit rates may be a temporary phenomenon as the current phase of higher interest rates may not continue beyond March. Thus, for the small investor, it may not make much sense to switch over to bank term deposits from small savings schemes.

With the financial year coming to a close this month, the pressure to offer higher rates on deposits may not be felt as banks normally do not feel the resource pressure in the beginning of the new fiscal.

Interest rates on deposits have risen by more than 100 basis points over the past few weeks, with banks reinventing schemes to tide over the March period. Banks tend to roll out a series of schemes, especially on shorter term deposits to be able to manage their finances in the end of the year, which is seasonally marked by a crunch in liquidity.

KV Kamath, ICICI Bank’s managing director and CEO pointed out, “At this point in time, fixed deposits are more attractive than small savings schemes. But one needs to watch out if this trend sustains in the longer run.” When superficially compared with rates of return offered by small savings schemes, bank term deposits seem more lucrative.

However, money managers are of a different view. They feel that it makes more sense for institutions rather than individual investors to avail of the rate party. Institutions such as provident fund trusts, corporates, etc, are the category of people having the wherewithal to keep track of rate movements on a daily basis and hence, can form an opinion on the arbitrage opportunities available.

According to a senior treasury manager with a private sector bank, “one can certainly expect a rate climb-down in certain pockets. But this does not mean that rates across the board may taper off. Given the focus on inflationary pressures and the approaching elections, rates may come off marginally in some cases, but definitely, are not likely to rise from the current levels.”

On the other hand, senior citizens form the majority of the small savings kitty. Now for this class of investors, transferring funds to bank deposits is highly undesirable as they may lack the bandwidth to handle such arbitrages. They largely flock to small savings schemes such as post office monthly income and term deposit schemes, to avail of a stable return at regular frequencies.

Also, given the fact that these schemes enjoy a sovereign guarantee attached to them, it guards such investors from the volatility that bank deposits may expose them to. RBI bonds are another class of instruments that most small investors have a preference for, given the simpler mechanics and wider distribution arena.