Those of you still sitting on a pile of cash, wondering where to invest — go for bank fixed deposits ... and fast.

The steep drop in the rate of inflation in the last couple of weeks has made investment in fixed deposits quite lucrative. But deposit rates are already on their way down, so head for your bank now.

High rates

Beginning October, banks and some public deposit taking NBFCs (non-banking finance companies) raised the interest rates on select deposit schemes to as high as 11 per cent (see chart).

However, with the inflation rate hovering above 11 per cent till the third week of October, the inflation-adjusted return on those special deposit schemes was negative.

Now that the inflation rate has fallen sharply to 8.9 per cent, the interest rate net of inflation on those deposits has turned positive. The pace of decline in the inflation rate was faster than expected (it was to come down to single digit by February-March next year). With a steady decline in commodity prices and a bumper kharif harvest in the offing, the inflation rate is now expected to fall to around 6 per cent by March-April next year.

If you lock in surplus money now in fixed deposits bearing an interest rate of 10.50 per cent or more, your investment stands to fetch a higher return.

Now or never

But you may have only a week’s time to grab this opportunity as a number of public sector banks will reduce the interest rates on special deposit schemes by half a percentage point in December.

The State Bank of India has already announced its revised interest rates which will be effective from December 1.

According to the new schedule, the bank will offer a maximum interest rate of 10 per cent on fixed deposits for 1,000 days against 10.50 per cent now. The bank has also lowered the interest rates for all other tenures by half a percentage point.

Corporation Bank has already withdrawn its CorpGain Super plan, a special fixed deposit scheme for 12 to 15 months carrying an interest rate of 10.50 per cent per annum. The maximum interest rate that the bank is now offering is 9.50 per cent on fixed deposits of one to three years. Allahabad Bank, which lowered its maximum deposit rate by half a percentage point with effect from November 24, will reduce the rate further by a quarter of a percentage point from December 1.

But other state-owned banks such as Canara Bank and Indian Bank are still offering a 10.50 per cent interest rate on fixed deposits of specified maturity. Private sector banks are also offering an interest rate between 10.50 per cent and 11 per cent.

Falling fast

However, those banks which have not yet announced their rate cuts are likely to do so by the first week of December. By the second week of December the maximum interest rate on fixed deposits will come down to 9.5-10 per cent.

If the Reserve Bank takes more measures to infuse liquidity into the banking system, deposit rates may fall further by the end of the year.

Therefore, it would be wise to park your funds in high-yielding deposits before the rates go down. The returns from fixed deposits are assured and equity markets are unlikely to bounce back before the last quarter of 2009.

Another advantage of investing in a fixed deposit is that banks give loans against FDs. If you park your funds now in a fixed deposit earning say 10.5 per cent interest annually, you can take a loan up to 75 per cent of this deposit six months or a year later at a much lower interest rate.

Tenure twist

Selection of the tenure of the fixed deposit is important. For example, ING Vysya Bank is offering an interest rate of 10.50 per cent on fixed deposits of one to two years. It is also offering a 10 per cent interest on deposits for 10 years. Now the question is whether you would like to lock in your funds for two years at an interest rate of 10.50 per cent or for 10 years at an interest rate of 10 per cent.

If you go in for a little higher interest rate, then by investing Rs 1 lakh you shall get Rs 23,034.06 in return as interest over a period of two years. Hence the compounded annual return on this investment will be 10.92 per cent.

If you lock in your funds for 10 years at an interest rate of 10 per cent, you shall get Rs 1,68,506.38 as interest on maturity. This entails a compounded annual return of 10.38 per cent.

To avoid the incidence of tax deducted at source on interest earned, split your investment between two or more fixed deposits with as many banks.