Term deposits of banks are expected to outperform their benchmark with an outstanding performance, owing to a rise in the surplus of liquidity that has been wasted in one hand, but on the other hand, it has increased the demand for bank funds in the country. All term deposit rates will rise with a subsequent hike in investments and the tightening of monetary policies in the country as they are gaining from the high liquidity of the banking system, signaling a massive change in the way banks will respond to fluctuations in policy rates in the near future. One cannot deny that commercial bank rates have fallen steadily over the past few years, much to the disappointment of the banking sector. The major reason behind this downfall in commercial bank rates was due to the situation of excess liquidity which had held down all such rates for quite some time now. However, with steps to ease out the monetary policies of the country, in addition to weak borrowings from private sectors increased the status of liquidity in the country, leaving banks flushed with funds.
As a result, commercial banks have rushed to deposit all their surplus funds with the Reserve Bank of India, and much to the disappointment of industry spectators, all such surplus funds came down, leading to a shift in the behavior of banks, who have moved their interests from net lenders to net borrowers of funds in the Reserve Bank of India. Although financial analysts believe that such an unprecedented move is likely to go down well with investors, particularly since they have been subject to a lot of fluctuations this year, from a rise in prices to a fall in rates of deposit, it has eventually led to constant erosion in their savings over the last year. This rise in bank rates is said to be complimentary to the investors’ interests as it will reduce the pace of economic activity in the country, which will in turn reduce inflationary pressures. While this hike in rates is said to occur at a gradual pace owing to the European financial crisis, it is expected to increase capital outflows thereby having a massive impact on the state of liquidity in the country. There are contrary remarks as well to the above statement as many believe that if such strong inflationary pressures occur, then the Reserve Bank of India will have no option but to increase its policy rates.
As banks continue their struggle in offering consistent schemes to investors, recent trends have indicated that investors are increasingly showing an interest in small savings schemes owing to the less risk involved, as opposed to other long-term and riskier options. In order to win back their investors, banks are expected to hike their fixed deposit rates. With interest rates rising on personal loans, home loans etc, people want to invest to fund their financial requirement on their own. And as term deposits continue to gain momentum with their profitable position, investors must not shy away from them now, and must place at least a small portion of their diversified portfolio in these funds. It would not only enhance their element of diversification, but if the current economic scenario is to be believed, then term deposits offered by banks are expected to emerge victorious over the next few months. Investors need to compare and contrast the deposit schemes offered by various banks before placing their investments in any scheme. Opt for a term deposit that best suits your needs and requirements. Compare the tenures and rates of interest offered by various banks in their various schemes. Then opt for a scheme that best fits in the relevant category.