In Search of Higher Returns Amid Falling Rates

As Bank Deposit Rates Fall, Even Conservative Investors Are Switching Assets. Where Can They Go?
 

- Mandar M Bakre & Ians

I Interests rates in India were anyway on their way down, and the Modi government’s withdrawal of Rs 500 and Rs 1,000 notes from legal use — dubbed “demonetisation” — has lowered them further.

The State Bank of India has reduced rates on fixed deposits (FDs) from one year to 455 days by 15 basis points to 6.90%, while ICICI Bank lowered its rate on deposits between 390 days to 2 years, by a similar quantum. HDFC Bank reduced interest on bulk deposits of Rs 1-5 crore across all tenures by 25 basis points.

The reductions are a natural effect of people depositing money in banks. As these deposits increase the banks’ cheaper, current account savings account (CASA) deposits, banks not longer have to attract customers to open time deposits, or FDs, which carry a higher interest rate and are therefore more expensive for banks.

According to Jagannadham Thunuguntla, head of fundamental research at Karvy Stock Broking, “Bank deposits will increase significantly, widening the capital base of banks, primarily CASA. This will reduce cost of borrowing for banks and simultaneously reduce cost of lending.”

So what are conservative investors to do? How does one seek higher rates of return even as the interest rates on bank fixed deposits fall? Even the Reserve Bank of India (RBI) says in its latest annual report that falling bank deposit rates had prompted people to turn to financial instruments like shares, mutual funds, debentures, currency and tax-free bonds for higher returns.