One positive fallout of the demonetisation move, apart from the fact that it is aimed at tackling black money and corruption menace, is that you as a consumer may benefit in the form of lower loan EMIs. With massive deposits being made in banks by people, most major banking institutions have cut their deposit rates. In the world of banking, cutting deposit rates is seen as a first positive sign that banks may cut lending rates as well. ICICI Bank, HDFC Bank and Canara have slashed their FD rates by up to 1%. While, ICICI Bank and HDFC Bank have cut their deposit rates by up to 0.25%, United Bank of India did it for short-term deposits by 1%. SBI has also slashed fixed deposit rates on select maturities by up to 0.15 per cent.
With banks having to pay lesser interest rates on your deposits, they now have the flexibility to lend at lower rates. But how soon would the lending rate on your home and car loan come down? According to Dr Arun Singh, Lead Economist at Dun & Bradstreet India, this may take anywhere between 3 to 6 months. “Going by the historic trends, I would say that banks should have room to cut lending rates in the coming two quarters. There has always been an inherent banking sector rigidity, when it comes to transferring benefits of lower deposit rates to lower lending rates. Now that deposits are surging, I think withing three to six months, consumers can expect some relief in terms of lower EMIs,” Arun Singh told FE Online.
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The RBI has over the past few months repeatedly urged banks to pass on the benefit of a repo rate cut to consumers. Banks have maintained that they are unable to pass on the benefit as they need to maintain high deposit rates to attract savers and because competing investments like post-office savings instruments are luring depositors away with a more attractive proposition. Subsequently, interest rates on small savings schemes were reduced marginally by 0.1 per cent for the October-December quarter of 2016-17, leading to lower returns on Public Provident Fund, Kisan Vikas Patra, Sukanya Samriddhi Account, among others. Excess liquidity with banks on account of growth in deposits due to demonetisation and the government’s signal that it is willing to cut rates on small savings when needed, are sending a positive signal on lending rates too.
Says Dhirendra Kumar CEO at Value Research, “EMIs will come down, because banks have the room to cut lending rates. How soon that will happen remains to be seen, but a 3 month horizon seems reasonable.”
And, what about fixed deposits? As a risk-averse investor, should you continue putting your money in FDs? If not, what are the other alternatives? Dhirendra Kumar is of the view that for the absolute risk averse investor, there is little option, but to invest in FDs. “But increasingly in the short-term funds would likely move to debt funds and equity-linked investments. Debt funds offer good returns, especially in the short term,” he tells FE Online.
Pradip Chakrabarty, Founder & CEO of advisorkhoj.com believes that FDs were never the best investment option, even for a risk-averse investor. “One should look at debt funds for good returns. Debt funds with a 3 year time frame are also tax efficient because they have indexation benefits. I would advise people to invest in AA+ or AAA+ portfolio debt funds, they are safe, and offer around 2-3% higher returns than FDs,” Chakrabarty tells FE Online. “One can also look at liquid funds,” he added. With the reversing of the interest rate cycle, debt or income related funds will see a further upside.