Saturday, August 21, 2010

Floating rate FDs on the anvil

The country's biggest bank, SBI may start offering floating interest rates on term deposits from 6th September. The floating rate term deposit product will offer no guarantee on returns, as the interest will change with the revision of base rates. This product has been there in other countries but is being offered for the first time in India.

In case the base rate is revised upward, the customer is benefited, but in case of a downward revision, they stand to lose compared to a fixed rate product.

The interest rate would change in tandem with the base rate, as and when a revision in the benchmark rate takes place. For a one-year floating fixed deposit of SBI, the interest rate will be 50 basis points lower than the existing base rate, which is currently 7.5 per cent. In comparison, the return on existing fixed deposits with a tenor of 1 year to 554 days stands at 6.75 per cent, while a 555-day fixed deposit earns an interest rate of 7.25 per cent.

In the case of a three-year floating term deposit, the interest rate will be 25 basis points lower than the base rate, while for a five-year floating term deposit, the interest rate will be at par with the base rate.

This may be a good product to invest now as the interest rates are expected to go up in the near future. Once the interest rates have peaked, investors can choose to go for fixed return deposit but for now the investors can look to benefit from this product.