Two-year FDs fetch more than 5-yr deposits

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Banks are offering their highest returns in the one to two-year category of deposits, an indication that they expect interest rates to come down in the medium term. A host of banks have revised their lending and deposit rates but are reserving the most-attractive returns on the medium-term fixed deposits .

The highest rate offered by the country's largest lender, State Bank of India , is 9% and this is the return on its 555-day and 1,000-day deposits. But those who decide to keep their money for a longer term will less. A five-year deposit with SBI will fetch only 8.25% while the return on 10-year deposits is 8.75%.

Private sector lender Lakshmi Vilas Bank offers 10.1% on one to two-year deposits and 9% on deposits of up to 3 years, but on long-term deposits of over five years it offers 7%.

Karnataka Bank has also revised its deposit rates and offers 9.75% in the one to two-year category. But on deposits of over 5 years, the rate of return slips to 9%.

Conventional economics says that rates rise along with tenure, and the current pricing of deposits appears to be an anomaly. But bankers have an explanation for this.

They say there are two reasons for why medium-term rates are higher. The first is that they believe that inflation would come down which would make lower fixed deposit rates more acceptable in the next year. Secondly, they say that it is impossible to predict future rates and since most of their loans are extended on floating rates, they would rather have the option to reprice deposits after a year.

Meanwhile, more banks have increased their lending rates. in the wake of the 0.25% increase in policy rates by the Reserve Bank of India even as the liquidity position eased marginally in the money markets.

On Monday, IDBI Bank raised its base rate by 50 bps to 9.50% and (benchmark prime lending rate) BPLR by 25 bps to 14.00%, respectively, on Monday. The base rate is the benchmark for all new floating rate loans and replaces the prime lending rate, which continues to be the benchmark for old loans where PLR was indicated as the peg. IDBI Bank was the first lender to offer over 10% on a certificate of deposit in recent months.

Indian Overseas Bank said that its board of directors has approved to increase the BPLR by 50 bps to 13.75%, while with effect from February 5, 2011. Another private sector lender, Development Credit Bank said that it has raised its BPLR and bps by 50 bps each to 16.25% and with effect from February 05, 2011. DCB also revised its 9%, respectively