Financial query about interest rates on FDs

[kalpeshc]

I'm planning to put some amount of saving in fixed deposits and was going through some interest rates. I found an interesting thing with these. Generally the rates should increase if the tenure increases but there are exceptions to this. Following are the rates for ICICI, but why is it more for 390, 590 and 890 days (only those instances). Is there any catch here?

e.g.
390 days 10.00%
391 days to 589 days 9.00%
590 days 10.00%
591 days & above upto 2 years 9.00%
More than 2 years upto 889 days 9.50%
890 days 10.00%
891 days upto 3 years 9.50%

[lambuhere1]

As far as my grey cells tell me, they are confident abt upto next 2 years that the inflation will be high and then their costs also along with it. Hence they give more interest rate upto 2 years to get the max funds into the system. May be I am wrong, but thats what I think.

[NetfreakBombay]

This is driven by yield curve . This page (Yield curve - Wikipedia, the free encyclopedia) has good summary of how and why this happens.

[kalpeshc]

No, that is not the query. My curiosity lies in the fact that the banks offer an interest rate of 9% for 390 days to 589 days but 10% on 590 days. But if you plan to invest a day more i.e. 591 days it drops back to 9%. That's strange isn't it?

Appears Greek and Latin - care to explain a novice in vanilla Angrezi ! Also, I do understand that higher the tenure the rates would increase, but the problems are the outliers. Why for those specific days, does the interest rates jump up and then come down again for the next upward slab of tenure.

Originally Posted by lambuhere1

As far as my grey cells tell me, they are confident abt upto next 2 years that the inflation will be high and then their costs also along with it. Hence they give more interest rate upto 2 years to get the max funds into the system. May be I am wrong, but thats what I think.

No, it's not inflation driven. The banks try to protect their margins on rates (lending and deposits). They always have to increase both together and its driven by RBI's rates.

[NetfreakBombay]

Originally Posted by kalpeshc

Also, I do understand that higher the tenure the rates would increase

That would be the case ONLY in a growing economy (A.k.a Normal Yield Curve). Such economy means more money / more demand and thus higher costs.

Inflation will ensure that Central banks need to suck money out of system. And that is done by raising interest rates.

Originally Posted by kalpeshc

No, it's not inflation driven. The banks try to protect their margins on rates (lending and deposits). They always have to increase both together and its driven by RBI's rates.

This assumes that deposits are source of funds for banks (as in old banking system).

This is not always the case. For example, A bank can borrow from Japan at 2.5% and lend in India for 12%.

[GTO]

OT but related : It really sucks to make any investments now; there simply aren't too many options for lucrative returns in the typical stock market, fixed deposit / similar categories. With inflation hovering @ 12%, the usual suspects will actually result in negative equity.

Looking, searching & evaluating..........