If financial planners are to be believed, it would be logical to put money in short term FDs. There are a number of valid reasons in favour of this strategy. Long term fixed deposits will lock in your money for 3-10 years. Financial planners say that going for short duration products at this point of time makes more sense. Another important point- long term lock-in takes away the flexibility to use that money. It simply means that one can’t liquidate the money before a certain period. Doing that leads to huge losses.

Normally, interest rates on long term products are much higher because one locks in money for a much longer period. But right now, there is not very much difference in short term and long term interest rates. For example, SBI is offering 7.5% interest rate on a 555 day deposit, and 7.75 per cent on a 1,000 day deposit. Such difference in interest rate is not enough to lock in the hard earned money for many more months.

Foreign lender Standard Chartered Bank has announced a 75 basis points rise in fixed deposit rates. The bank would now offer 7.75% interest on 121-179 days maturities, as compared to 7.25% earlier. Deposits having tenure of 180-260 days will earn the depositor 7.75% interest as against 7% earlier. The revised rates have come into effect from December 21.

Public sector lender Bank of Maharashtra has hiked interest rates on its fixed deposits with effect from December 15. The bank has revised interest rates of deposits having tenor of 181 days to 270 days to 7.25%. Interest rate will be 8.3% for deposits of tenor 1 to 3 years. Senior citizens will be offered 50 bps more interest for deposits of 91 days and above.

Another Public sector lender Union Bank of India has increased fixed deposit rates across different maturities. A special 700 day deposit has been introduced by the bank which would be fetching the depositor an interest of 8.6%. The interest on deposit of one year maturity has been increased to 8% from 7.25% earlier.

Public sector lender IDBI Bank raised deposit rates in the range of 25 to 100 basis points across different maturities. The deposit rates hike has come into effect from December 15, 2010. The bank has made the highest rise in case of the 46-90 days deposit where the interest now stands at 5.5% as against 4.5% earlier. The highest interest rate is 8.75% which will be fetched by the 1100 days deposit which had interest rate of 8.25% earlier.

Public sector lender Oriental Bank of Commerce (OBC) has offered a special scheme for 1000 days deposits wherein it would offer interest of 8.75%. Dhanlaxmi Bank has raised its deposit rates in the range of 75 to 175 basis points across different maturities. Two slabs of tenures 91-120 days and 121-179 days have been clubbed into a single deposit of tenor of 91-179 days, offering an interest rate of 7.25%. Interest rate on maturities of 15-45 days has been increased to 5%, with a 100 basis points hike. On the other hand, rates for deposits with tenure of between 46-90 days have also been hiked to 5%.

Financial planners are saying that interest rates are expected to go up in the next few months. This is other reason for preferring short term products. Banks have recently started to hike deposit and lending rates. So there could be some more rate hikes by the banks after RBI’s expected policy rates hikes. So it would be wise to fix the money in higher interest rate regime, which is not very far now.

As we know, surplus liquidity in the system leads to rising inflation rates. Hence, to reduce the liquidity, the central bank RBI raises key policy rates like CRR, SLR, repo and reverse repo rate. These are the instruments used by the central bank to control the liquidity in the system. With increase in repo rate (Repo rate is the rate at which banks borrow funds from RBI), banks come under pressure to pay more interest to RBI for their borrowings. If RBI hikes CRR, banks are forced to set aside larger amount of deposits as reserve with the central bank. Funds available with banks decrease in both these cases. Hence, to attract more funds, banks increase deposit rates so that depositors put more money with them.

D. Alok