While the RBI's previous credit policy effectively ended the teaser rate home loan schemes, the hike in the credit reserve ratio (CRR) coupled with that in the repo and reverse repo rates has signalled that banks need to raise funds. They'll have to collect capital to cope with the expected growth in credit demand, especially from corporates. The advance tax figures of top Indian firms for the quarter ended March 2010 indicates that the financial results are going to be good. This means that companies will need funds to cope with the increase in demand. The positive effect is that banks have started raising interest rates on fixed deposits. Depending on the term, the rates have gone up by 25-150 basis points. The majority of the hikes, however, are in the 1-2-year and 2-3-year deposits because banks are waiting for the demand to pick up before formulating a strategy.
Should you subscribe? For one, the hike in rates is a signal of hardening interest rates. Also, given the high inflation, the posttax returns will be negative. However, if you still prefer deposits because of the low risk involved, you can consider the one-year deposit. This will give you the option to choose a better opportunity later on. If you can afford to wait, do so till the end of April to hear from the central bank again, which will give you a better idea of where the rates are headed.
