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SBI’s new strategy

After increasing lending rates, SBI, as expected raised its deposit rates by up to 75 basic points in last month. Now the depositors can get a return of 9.5 % on fixed deposits (FDs) between one year and three years, as against 8.75% earlier. However, the interest rates on FDs of more than five years remained unchanged at 9%. The new rate was made effective from June, 30th, 2008.

In spite of increase in rates, the net return on FDs after discounting current high inflation of 11.4% will be negative. But as compare to rate of 8.75% return earlier, this will bring a little relief to the depositors. This indirectly means that the value of returns including interest on maturity will be less than the principal. Other banks will also follow SBI to mobilize funds in a competitive scenario sooner or later. As the liquidity shall get tightened following RBI’s measures like increase in cash reserve ratio to contain inflation, banks have no option but to increase interest rates. This is the second time in a row that SBI has increased its deposit rate within a month. The last increase of 50 basic points was effective in June 1st, 2008.

Interest rates on fixed deposits up to six months are left unchanged between 4.75% & 7%. Rates on FDs of 6-12 months is raised by 50 basic points to 8%. Even though the interest rates on more than five years FDs have not been changed, still it is more attractive as it is one of the tax savings instrument under section 80c. The interest income on FDs up to Rs. One lakh of more than five years is not taxed. Hence the more than five year FD scheme is beneficial.

Whereas, on fixed deposits of less than five years, the depositors will have to pay tax. If the subscriber is in 30% tax bracket, the net return from fixed deposits of one to three years, where one gets 9.5% interest, will be only 6.56% . Under the new scheme interest rates on fixed deposits of senior citizens (60 years & above) has also been increased by up to 75 basic points. While interest rates on FDs of one to three years of senior citizens has been raised up to 10% , that for 3-5 years is fixed at 9.5%. The unusual inflation which brought the lending rate high to the discomfort of the subscribers may be little compensated by the increase of interest rates on deposits. But overall it is a loss-loss situation for the subscribers putting together the lenders & the depositors.

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