SBI’s new floating interest regime makes FDs more complex

Fixed deposits (FDs) are turning tricky as bankers are deciding to line FDs to match fluctuating interest rate cycles. 

State Bank of India, the country's largest lender, and home loan giant HDFC have both already decided to link the return on FDs to the base rate, which generally runs parallel to interest rate moves by the Reserve Bank of India, and can change half-yearly or even quarterly.

From 6 September, SBI will offer a variable rate fixed deposit for the tenures of two, three, and five years. Thus if you take a five-year FD the interest earned will be equal to the base rate during that period, while for two and three year FDs, the rate is 0.25-0.5 per cent lower than the base rate. The base rate is the lowest rate at which a bank can lend to customers. It is reviewed by banks each quarter. 

HDFC provides a similar facility as a recurring deposit. Called systematic savings plan, it requires deposit of a minimum of Rs2,000 per month. 

Presently, HDFC offers an interest rate of 7.25 per cent for two to less than three years, 7.5 per cent for three to less than five years, and 8 per cent for a five-year recurring deposit.

This changed in March 2010 from the initial rates of 7 per cent for 24-35 months, 7.25 per cent for 36-59 months and 7.75 per cent for 60 months.