Will higher FD rates lure equity investors?

As credit growth picks up at a faster pace than deposits, several national banks are resorting to raising deposit rates to meet loan demand.

As of July 29, aggregate growth in bank deposits was only 9.1% on a yearly basis vs 14.5 % a year ago, as per RBI’s latest data.

Against this backdrop, the country’s largest lender SBI recently launched a special 75-day deposit scheme offering 6.1% annual returns on fixed deposits with a tenor of 1,000 days.

Bank of Baroda and Canara Bank have also unveiled similar schemes.

The rising rates on safer assets such as fixed deposits are, however, not enough for equity investors to park/diverge their funds, according to experts.

G Chokkalingam, founder and chief investment officer at Equinomics Research believes a majority of investors will not shift significantly towards fixed income instruments just because interest rates are 50 basis points (bps) or even 200 bps higher.

“Historically, equity market investors have seen strong double-digit interest rates offered by banks still allocated to equities. They now expect a minimum of 15% annualised returns, if not multi-baggers within a year,” he says.  

Over the past few years, market returns have been much higher than that of bank deposits.

Incidentally, between 2019 and 2021, the Sensex and Nifty indices have returned 14%-22% each year, while a one-year FD in a nationalised bank like SBI has moved from 4.9% in 2019 to 5.3% in 2021.

At the rates being offered by banks, the overall return on investment is still negative if one considers the post-tax return, analysts said.

Gaurang Shah, Head Investment Strategist, Geojit Financial Services says post tax return on FD is not enough. Investors must diversify and expect equity returns to be much better going ahead, he says. 

Narendra Solanki of Anand Rathi also has a similar opinion. Market valuation, he said, has become reasonable for investors to get in.

Narendra Solanki, Head- Equity Research, Anand Rathi Shares & Stock Brokers says do not see a major shift to FDs. Market valuations are now reasonable. Only short-term liquid funds can see outflows into FDs.

On Thursday, the markets will react to the minutes of the US Federal Reserve’s minutes of the July meeting. Back home, stock-specific action will continue.