Floating rate deposits do not make sense anymore

IDBI Bank Ltd launched its fixed deposit in the form of Floating Rate Interest on Term Deposits or FRTD yesterday. RK Bansal, Executive Director, IDBI Bank Ltd says, “It is a variant of fixed deposits, wherein the rate of interest is not fixed for the entire tenor of the deposit, but moves in tandem with a reference rate, quarterly.”

Finer Details:

Interest Rate: The interest rate for these deposits will be pegged to a market-based rupee benchmark rate, which is the average yield at 364-Days Treasury Bills Auctions undertaken by the Reserve Bank of India during the preceding three months. Last quarter’s interest rate for T-bill was 8.19%. Says Bansal, “There is a mark- up of 1% to 1.4% over applicable the T-bill interest rate depending on the tenure of the deposit you choose to invest in.”

[caption id=“attachment_428014” align=“alignleft” width=“380”]  The rates which you get are uncertain and there is always an option to take a regular FD where you get fixed rate of returns.[/caption]

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Period: The deposit will have a lock-in period of one year and available in the maturity slabs of 1, 2, 3, 5, 7, and 10 years. In fact, even existing FD investors with the bank are permitted to switch their FDs into a FRTDs. The bank does not charge a fee for the same, but you will have to comply with conditions that apply. For instance, if you have an existing FD for five years and you are already over with a one year, and if you plan to switch to the floating rate deposit now, you will have to keep the deposit for the remaining four years. Keep in mind, that a conversion from floating to fixed rate is not allowed.

Amounts: You can invest a minimum amount of Rs10,000 and thereafter in multiples of Rs1000. The maximum amount you are permitted to invest is Rs 1 crore.

Does it make sense: Says, Bansal, “Investment in FRTDs is especially beneficial when the interest rates are expected to rise as it enables the investors to take advantage of periodic increase in the market rates.” But deposit like these may work in a rising interest rate scenario, not in a falling one.

Says, Surya Bhatia, Delhi based certified financial planner, “This product is not a good choice. Interest rates are expected to fall down anytime soon, and why should you expose your income side to floating rates, which are expected to fall. Of course rising rates will allow you to get a higher rate and avoid the head ached of breaking FDs to reinvest them at higher rates, but in the current scenario, this investment may not be the wisest choice.”

After all, the rates which you get are uncertain and there is always an option to take a regular FD where you get fixed rate of returns. In fact, a few years back, State Bank of India also had come out with floating rate FD where the interest was linked to the banks’ base rate.

In a recent press conference a senior SBI officer said, that the floating rate deposits which SBI offered did not take off. A product like this will not work for elderly and pensioners who need an assured rate of return to ensure a steady cash flow. Unless you fully understand what you are getting into, staying away from this, would be a wiser choice.