Rates are inching up. Time to act

Depositors should lock only for a short period and borrowers must shop for the best rates

The past two years have been quite eventful for depositors and borrowers. While depositors have been hit hard due to the steep fall in interest rates on fixed deposits, borrowers have been a happy lot, thanks to cheaper lending rates. But a few banks have been changing gears over the past month by subtly, but surely, increasing deposit and lending rates. It could be only a matter of time before others follow suit.

Here is how depositors and borrowers should play the rate game in the coming months.

Keep your powder dry

Much to depositors’ chagrin, banks have been a little too nimble in cutting deposit rates over the last two to three years. But the good news now is that a few banks have already started increasing deposit rates. Recently, Axis Bank increased its deposit rates by 65 bps in certain buckets. DCB, IndusInd Bank and Laxmi Vilas Bank are a few others that have tinkered with deposit rates.

If you have some surplus now, you may be looking to invest in deposits. But be sure to lock them only for a short period of time. There are two key reasons for this.

One, banks have only now started increasing deposit rates. Hence, locking into longer term deposits would deprive you of higher rates in a year or two. Secondly, our study of deposit rates for a 20-year period, reveals that if you have about a five to seven year time horizon, rate cycles matter a lot while deciding the tenure of deposits. If, for instance, you would have invested in short-term deposits (one to two years) at the end of the rate easing cycle in 2004 or 2009, annual returns would have been higher at 7.6-7.8 per cent than the 6.8-7.2 per cent for longer tenure deposits.

In the current context, as the rate increase has just begun, go for very short term — six months to one-year deposits. This will help you ride rate increases in future when reinvesting on maturity. Most banks offer 6.5-6.75 per cent for such deposits, while a few others offer a tad better rates. RBL Bank offers a higher 7 per cent interest on deposits from 91 days to 180 days; Kotak Bank offers 6.85 per cent for 390-day deposit; City Union Bank offers 7 per cent on 181 days to 364 days deposits, while Bandhan offers 7 per cent for a one-year deposit. IDFC Bank offers a special rate of 7.5 per cent for a 366-day deposit.

Lock into cheap loan rates

If banks have increased deposit rates, a few have also increased their benchmark lending rates recently. Dena Bank, Kotak and Axis Bank increased their one-year MCLR by 5 bps recently. HDFC Bank and IndusInd have increased their MCLR by 10 basis points in the past one month. For YES Bank, its one-year MCLR has gone up by a notable 30 bps from 8.85 per cent in December 2017 to 9.15 per cent in February 2018.

New borrowers looking to take fresh loans should shop for the best rates. With rate increases likely to pick up pace, locking into cheapest rates now would cushion the increase in EMIs. For loans up to ₹75 lakh, Indian Bank, offering 8.25 per cent, appears to be the cheapest for now. Allahabad Bank, Bank of India, Union Bank of India and Central Bank of India charge 8.3 per cent on home loans.

Dena Bank and SBI charge 8.35 per cent. Note that these are all floating rates.

For existing borrowers under MCLR, there are banks that charge at least 30-50 bps higher rates on home loans, than the best deals. You could consider switching after working out the math on savings vs costs for making the move.

Borrowers under MCLR should note that lending rates are reset only at intervals corresponding to the tenure of the MCLR. In case of home loans, for instance, since the loans are benchmarked against the one-year MCLR, lending rates will only be reset every year. So the increase in your lending rate will depend on when you took the loan the previous year.

Borrowers under the base rate system have not benefited much from the rate cuts in the last one-two years.

But now is not the time to make the switch to MCLR. The RBI has decided to link base rate with MCLR, effective April 1 2018.

You can wait a bit till the contours of linking are out.

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