Bank deposit a hot pick:

Mumbai, April 15: Post office small savings and mutual funds are set to cede the ground further to bank deposits as expectations rise of another round of hikes in the key policy rates of the Reserve Bank of India. The growth in bank deposits, which now offer interest rates at between 9 per cent and 10 per cent, has been rapid over the past couple of months, with investors withdrawing money from other savings instruments in favour of banks. The total outstanding deposits is more than Rs 2,594,259 crore at the end of the quarter, according to the RBI. This growth was mainly fuelled by the shift of savings to fixed deposits, lured by high interest rates. For the first nine months of 2006-07, the growth in deposits was at around 18 per cent, well below the rise in advances which was at around 30 per cent. Banking circles feel the funds in post office savings schemes, mutual funds or other fixed income instruments have been flowing into fixed deposits. With the central bank expected to raise rates again, many more investors could turn to deposits. Sudhir Joshi, treasurer of HDFC Bank, said, “There is a general rise in the level of interest in fixed deposits. They are very competitively priced compared with other fixed income instruments. Mutual funds enjoyed certain tax advantages which has gone away. This has offered banks a level-playing field when interest rates have become competitive.” Finance minister P. Chidambaram had increased the dividend distribution tax on money market mutual funds in the budget. This led to bulk money, particularly from corporates, flowing into deposits. A senior official of a private sector bank said there was a rise in bulk deposits, particularly after the budget. “It did rise in March,” he added. The interest rate differentials compared with other savings instruments have also led to premature withdrawals from post office small savings, with the monthly income scheme being the main casualty. “These have come more from senior citizens who enjoy higher rates on bank deposits,” sources added. Subrat Pani, head of retail liability and sales at ICICI Bank, who expects deposit growth to cross 25 per cent, said income deposits have become the preferred investment in the short-term for individuals and senior citizens. Pani added that while money moved from PPF, NSC and post office savings to fixed deposits because of better rates, mobilisation efforts by banks also led to the good growth in deposits. However, Gaurav Mashruwala, a financial planner, feels individuals should not rush into bank deposits. He said such decisions should be based on an individual’s need and tax claims. “If the individual is in a higher tax bracket, it is advisable to put the money in a fixed maturity plan of a mutual fund,” he said.[From Internet]