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Bank FDs now fetch less than savings accounts

Kolkata: It is no longer pays to keep your money in the bank. Fixed deposits (FD) prices have plummeted in recent months, with short-term rates are now hovering close or below savings account rates for some banks.

Surplus liquidity and sluggish credit growth forced banks to reduce deposit rates in the short and long term deposits, made savers move toward more risky instruments, such as debt mutual funds or even equity assets. Deposit growth shrunk in the last fiscal year and has grown less than 2% so far in the current financial year despite all-round risk aversion and turmoil in the equity and debt markets.

The State Bank of India (SBI), the country's largest bank, now offers 2.9 percent to FD’s between seven and 45 days. This is slightly better than the 2.7 percent offered on savings bank accounts.

For Kotak Mahindra Bank and HDFC Bank, short-term FD rates are lower than savings rates. Kotak Mahindra Bank offers an additional 50 basis points for savings bank customers, while HDFC and Punjab National Bank offer 25 basis points more than rates at the shortest end of the curve, i.e. seven days. Seniors generally earn 50 basis points more than the card rates.

Bank FDs now fetch less than savings accounts

" Cut in drop rates typically precede or succeed shifts in the lending rates as institutions look to maintain margins, but understandably sustained reduction in deposit returns poses a financial and moral dilemma,” said Radhika Rao, an economist at DBS Bank.

"The perception of credit risk dictates how excess liquidity can convincingly reduce the cost of funds while avoiding risk at the present time. In addition, this has diminished the marginal benefit of further reductions in repo rates and easy liquidity operations."

Deposit growth decreased to about 8% in the fiscal year ending in March 2020 compared to 10% in fiscal 19. In this year, to date, deposits have grown by 1.9 per hundred in the first two months, although they have declined slightly in the two weeks that ended On May 22.

"With deposit rates so low, we see that flows are beginning to head towards other debt instruments such as tax-free bonds, gold sovereign bonds, and even a return to mutual funds and debt funds," said Sandeep Das, head of Barclays Private Clients India. 


Low revenue can negatively affect savings generation in the country, which is already at least 15 years old. India's total savings decreased to 30.1 percent of GDP in FY 19 from 34.6 percent in FY12 and 36 percent in FY 2008. Household savings fell to 18 percent in FY 19 from 23 percent in 2012, according to the Central Bureau of Statistics data.

“Term deposit rates close to the saving rate could also indicate uncertainty on the long-term economic front. Partha Ray, IIM economics professor Calcutta, said that injecting liquidity without the possibility of spreading credit could lead to banks having excessively modified loans.

Madan Sabnavis, the chief economist at CARE valuations, expects bond yields to remain within their range. "Liquidity returns to RBI through a reverse warehouse and can ultimately be invested in government securities and government development loans. More GC issues will increase returns, while surplus funds will offset the same until credit recovers."

"Fleeing to real risk assets such as credit, stocks, and/or private markets has been reduced so far. Das of Barclays said investors are still suffering from a lack of their basic provisions for high-risk assets such as stocks and are on the sidelines." He added that any correction of more than 10 percent in the broader equity markets should attract this FOMO (fear of loss) crowd in the markets.

"The TINA factor (there is no alternative) is also developing in the minds of investors, with very low savings and deposit rates ... earnings returns (after the current crisis) look attractive, especially in business," Das said.

Source: Economics Times

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