Research topic:

“IMPACT OF INTEREST RATE ON FIXED DEPOSIT”

Prepared by: Submitted to:

Hub no: 5 Prof. Anitha Thomas

Div: B 2nd sem

Nisarg Kapadia(921)

Sandip Kukadia(923)

Digvirendra Parmar(929)

Nirmal Mistry(927)

Pritesh Mapara(925)
Research Objective: “To find out whether interest rate affects savings
decision in fixed deposit or not & to understand the trend of investment.”

Research Process:
1) Management Dilemma :

“What is the relation between interest rate and fixed deposit?”

2) Management Question:

“How can management find out relation between interest rate & fixed
deposit?”

3) Research Question:

1. Does interest rate affects savings decision in fd?

2. Does inflation rate affects savings decision in fd?

3. Does risk factor affects savings decision in fd?

4. Does return affects savings decision in fd?

5. Does safety affects savings decision in fd?

6.Does other sources affects savings decision in fd?

4) Research design:

Type: Analytical
 Time frame: Short term

Purpose: To find out relation between fd & interest rate & fd.

1.Secondary data search

Fixed Deposit India

Thursday, March 18, 2010

How to match the interest earned on fixed deposit with the tax deducted by the
bank?

Fixed deposits (FD) is the most convenient and simple instrument of investment. In
this you can know about the earnings at the time of making deposit but the difficult
part is to match the amount of interest earned on these deposits with the amount
received and the tax deducted at source.

Let us take a case study to understand this point.

For instance Rajesh invests Rs 100,000, for one-year each in two FDs, in the
financial year 2009-10. One investment he did in the beginning of the 2009 and will
mature in March 2010 at the rate of interest of 7%. The second investment he did in
July 1, 2009 at 7.2 per cent. Both the FDs will give simple interest cumulated at
maturity, though for accounting purposes the amount accrues to the investment at
the end of each quarter. In case Rajesh considers the interest earned when it is
received, how will he account for the second deposit? How to match the interest
earned with the tax deducted by the bank?

How to tackle this issue

First, what is the method of recognizing the income or interest earned? One is the
accrual method in this the amount accrued on the deposit during the year is
considered as income, even if not received. The other is the income when actually
received, the cash way of accounting.

Generally an investor will find the former method convenient, especially when the
income with a bank is crossing Rs 10,000 in the year. Therefore, Tax Deduction at
Source (TDS), will be done, it will be in tune with the route adopted by the bank.
Here, the bank will consider the income earned by the depositor till the end of
financial year and then deducts the tax on it.

The tax authorities have said banks should deduct TDS only on the amount credited
and not on the provisions made. Thus, Rajesh must know when bank is crediting
income to his account, in this case, quarterly, and this is the figure to be taken for
accounting purposes.

In this case the income will be credited with the maturity, for the deposit that is
maturing in March 2010. Thus, the interest earned will be Rs 7,000 for the year. The
interest earned will be included in the investor's total income. Hence the income is
actually received, so there is no complication.

The second deposit will also pay the amount at maturity. This deposit will mature in
one-year time on July 1, 2010. As it is clearly stated that deposit amount will
accrues at the end of every quarter, there is a need to consider the income earned
till the end of March. The bank will follow the same procedure and they will use this
for tax deduction. The income earned, here, will be Rs 5,400 till the end of March.
Hence the investor should consider the income till March 2010, even though he may
not have received the amount from the bank.

The tricky part is the alignment for taxation. The investor will get the net amount
after TDS, as the amount of interest earned will be crossing the limit of Rs 10,000
during the year. Let us make it simple for understanding. Suppose the interest of
rate is 10 per cent (without cess) for tax deduction. Thus, the amount received by
Rajesh will be reduced by Rs 1,240 (10 per cent of 7,000 plus 5,400) for the TDS
and the net amount received will be Rs 4,160.

To calculate the total income earned during the year, Rajesh cannot add the
amounts received, as there is a TDS amount involved. He has to gross the total
amount earned, which will be Rs 7,000 plus Rs 5,400 that is a total of Rs 12,400.
This figure will be included in the income for the year under the head of income
from other sources. Thus, the total amount of income and the tax payable on this
income will be calculated. From this, the TDS amount has already been deducted by
the bank, Rs 1,240, will be adjusted and the whole process is completed.

Friday, February 26, 2010

Slowly banks are raising fixed deposit rates

In the coming months fixed deposit can again be a good investment option as the
deposit rates are on their way up. But the things will get better in fiscal 2010-11.
Last week HDFC Bank had raised its deposit rates by 25-150 basis points (one basis
point equals one-hundredth of 1%) across various terms. Earlier this month, IDBI
Bank and ICICI Bank had raised the deposit rates by 25-50 basis points for some
maturities, while J&K Bank had raised rates by 75 basis points on deposits above
one year. The public sector Union Bank of India is proposed to raise deposit rates
later this week. More banks are likely to follow the suit.

According to analysts the bigger banks will join the bandwagon to remain in
competition. Ashish Gupta and Deepak Ramineedi, analysts at Credit Suisse, wrote
in a report dated February 22, “With these rate actions, State Bank of India and
ICICI Bank deposit rates are now at a 50-100 basis point discount (for some
maturities) and they will now need to follow suit.”

But big bankers disagree with it. OP Bhatt, chairman, SBI, said in Delhi that his bank
will not raise deposit rates before May-June as it has surplus liquidity (the amount of
free money it had to give out as loans).

By the end of December 31, 2009, the bank liquidity was whopping over Rs 75,000
crore.

MD Mallya, chairman and managing director, Bank of Baroda said, “There is ample
liquidity in the system. Hence, at the moment we are not looking at raising interest
rates on deposits.”

But Gupta and Ramineedi of Credit Suisse said that “as loan growth (14.8%
currently) accelerates and the central bank starts tightening money, this liquidity
will also dry up soon.” In the recent past banks’ deposit growth rates have declined
as much as four-year low of 17%. Therefore, banks raise lending rates then deposit
rates have to rise.

Banks hike FD rates to cope with high inflation

June 23, 2008 by comparefixeddeposits

After increasing the lending rates, banks have started increasing deposit rates. This will bring
some cheer for depositors — particularly for the retired persons and those who mainly depend on
interest income.

The deposit rates may be revised upwards further, if inflation continues to rise. High rate of
inflation affects the net return of a depositor. With inflation at 8.75%, net return to a depositor
has already been reduced substantially. It is believed that if inflation persists at the current rate,
banks will have to revise both the lending as well as deposits rates upwards again.

After SBI, which had increased the deposits rates last month, Oriental Bank of Commerce, Yes
Bank and Bank of India have increased deposits rates by half a percentage point to one
percentage point.
Oriental Bank of Commerce has raised the rates for its special deposit scheme Asha Kiran (FDs
for 400 days) to 9.75% for senior citizens.

For the common man, the interest rate on 400-day deposits is 9.25%.

Yes Bank increased the rates by 0.5 percentage points across all maturities. After this, senior
citizen depositors of Yes Bank would get a maximum of 10% on fixed deposits with a maturity
of one year to 18 months. The others would receive 9.5% return.

SBI revised FD rates for 5-10 years by 0.5 percentage point to 9% while 3-5 years tenure was
hiked by 0.35 percentage points. Senior citizens will get 0.5 percentage more.

Bank of India also increased deposit rates up to 0.5 percentage point for various maturities. For
maturities between one year and two years, the revised rates would be 9.15%, against the earlier
rate of 8.50%. For two to three years, the new rate is 9.25% as against earlier rate of 8.75%.

Similarly, fixed deposits of Bank of India of the maturity of three to five years will earn 9.50%
interest, against the earlier 8.75%.

Recently, Reserve Bank of India had hiked the overnight lending rates for banks by 0.25
percentage points. A senior banker said this has led to rise in both the deposits as well as lending
rates.

If the inflation continue to rise and crosses 10% mark, there will be another bout of increase in
the interest rates in the countr

The Income-Expenditure Model when

Investment Depends on Interest Rate

If
People
Expecte People Peopl
will Governme Investme Investmen
d will e Will
Pay nt Spends nt @ 5% t @ 4%
Income Spend Save
Taxes
Is:

500 20 450 30 20 45 60

600 20 530 50 20 50 65
 700 20 610 70 20 55 70

800 20 690 90 20 60 75

When we construct a graph showing equilibrium income is for each level of interest rate, we get
a curve similar to that graphed below. It is called the IS curve, and its name comes from the
condition for equilibrium when there is no government in the model: investment (I) must equal
savings (S).

The addition of the interest rate to the income-expenditure model opens a way for monetary
policy to influence spending within the logic of this model. When the central bank allows the
banking system to create more money, banks increase their lending. This additional supply of
funds reduces interest rates. Lower interest rates increase investment, which has a multiplier
effect on total spending. A contraction of money will have opposite results.

http://ingrimayne.com/econ/optional/ISLM/IS.html

Tamilnow Articles -> India Investment Trends

Investing wisely is an important part of financial security. Try to start invest money as early
as possible so that the money will grow accordingly in your lifetime. Today Indian youths
are well paid compared to last decades thanks to Information Technology, ITES like BPO,
Call Center and overall strong economy. So people are able to save more money. Choosing
a wise investment is very crucial because you have to balance the risks and returns. For
example many people invest private firms which offer very high interest rate but they may
vanish after some time loosing all the invested money. Here are some major investment
options popular in India

Bank Fixed Deposits

This is a very common investment method. Risk is very less compared to other type of
investments but return also not very high. Interest rate varies from bank to bank and
depends on the scheme you choose. Tenure can be anything between 15 days to 5 years.
All leading nationalized, private and co-operative banks offer fixed deposits. Different banks
have different schemes and features like easy FD, cash certificate, auto renewal, free credit
card with FD etc

Life Insurance

This is another important investment option in India. Life insurance Corporation of India, a
Government of India undertaking is the market leader followed by private players like ICICI
Prudential Life Insurance, Bajaj Alliance Life Insurance, HDFC Standard Life, Birla Sunlife,
Kotak Mahindra, Reliance Life Insurance, Tata AIG Life, Aviva Life Insurance etc

Real Estate/Property

Property prices in major Indian cities are doubling in every 2-3 years so investing in
property is a good idea. Investing in property is also a safe investment with good returns.
Buy a flat, property or individual house is a prime area or suburbs of main cities and it will
appreciate well in another few years. Getting a housing loan is not very difficult these days.
Invest in property in main cities like Mumbai, Delhi, Chennai, Bangalore, Hyderabad,
Calcutta, Kochi etc.

Postal Saving Schemes

Apart from postal services like delivering letters, registers, parcels and money orders Postal
department of India offers financial services like recurring deposit, postal life insurance,
saving account and national saving certificate.

Gold

Investing in gold is another good option for long term. Normally gold appreciate about 17%
per year. It is a very good return when inflation is about 4 to 6%. When investing in gold it
is better to invest in gold coins or gold mutual funds. When you buy gold as ornaments you
will loose money as making charges and wastage.

Shares and Mutual Funds

Investing in Shares and Mutual Funds are risky options but return is more. You will have to
study about the company well before investing. To invest in shares you have to start a
demat account first. If you have enough time to spend they study about the companies and
invest wisely otherwise invest in mutual funds.

National Saving Certificate and Public Provident Fund

NSCs and PPFs are safe and secure investment method but return is less compared to
current bank interest rates and share market returns

Bonds, Chit Funds and Company FDs

Other possible investment options are bonds, chit funds and company FDs. Some chit funds
and company FDs offer high interest rates but may vanish after some times. So be careful
while investing in such firms.

General Investment Trends

Majority of Indians choose Fixed deposits, real estate and life insurance as their primary
investment method. Also many prefers NSC, PPF and other safe investment methods to
invest their hard earned money. Postal saving schemes also popular in retired people and
senior citizens.

• http://www.tamilnow.com/articles/india-investment-trends.htm
•

SBI’s Fixed Deposit Interest Rates (2009)

The new rates are lower than the previous rates.

Interest Rates for Deposits below Rs. One Crore

(% p.a.)

Tenors Existing w.e.f. Revised w.e.f. 15.06.2009

18.5.2009

15 days to 45 days 3.25 3.00

46 days to 90 days 4.25 4.00

91 days to 180 days 5.50 5.25

181 days to less than 1 year 6.50 6.25

1 year to less than 2 years 7.25 7.00

2 years to less than 1000 days 7.50 7.25

1000 days 7.75 7.50

1001 days to less than 3 years 7.50 7.25

3 year to less than 5 years 7.50 7.25

5 years to less than 8 years 8.00 7.75

8 years and up to 10 years 8.25 8.00

http://www.banknetindia.com/banking/depositstudy.htm
2. Sampling design: Take samples from vapi and surrounding of people
>25years and investing in fd.

3. Instrument design: Make a questionnaire to find out objective.

The questionnaire is as follows.

QUESTIONNAIRE

1. Gender: □Male □Female

2. Age:
□20-30 Years

□31-40 Years
 □41-50 Years

□60 Years and above

3. Education:
□upto 10th

□upto 12th

□graduation

□post graduation

4. Occupation:
□Job □Business

5. Income:
□1.5-2.5 lacks

□2.51-3.5 lacks

□3.51-4.5 lacks

□4.51 lacks and above

6. Number of members in your family: ___

7. Number of working people in your family: ___

8. Are you investing your money?

□Yes □No

9. Select the sources of investment you are aware about

□Fixed Deposit □Stock Market

□Insurance □Gold

□Mutual Fund □Real Estate

□Bonds □Equity
 Please specify if any other __________________

10. Select the sources of investment where you have

invested your money
□Fixed Deposit □Stock Market

□Insurance □Gold

□Mutual Fund □Real Estate

□Bonds □Equity

Please specify if any other __________________

11. Rank the sources of investment

□Fixed Deposit □Stock Market

□Insurance □Gold

□Mutual Fund □Real Estate

□Bonds □Equity

Please specify if any other __________________

12. What % age of your savings you have invested in

____Fixed Deposit ____Stock Market

____Insurance ____Gold

____Mutual Fund ____Real Estate

____Bonds ____Equity

13. Duration of investment you will go for

□Short term □Long term

14. Rate what is more important for you while making

investment decision
Safety: 1 2 3 4 5
 Higher Return: 1 2 3 4 5

15 .Does inflation rate affects your savings decision?

□Yes □No

16. Does inflation rate affects your savings decision in FD?

□Yes □No

17. If interest rate increases then you would

□Invest in FD

□invest in other sources

18. If interest rate decreases then you would

□Invest in FD

□Invest in other sources

19. If other sources are giving higher return then FD then

also you would like to invest in FD?
□Yes □No

20. Does market trend affects your savings decision?

□Yes □No

21. Does level of complexity involved in the procedure

affect your savings decision?
□Yes □No
6)Data collection and preparation: Collect data from the vapi and
pardi on random basis of the required sample i.e. people >25 yrs and investing in fd.

7)Data analysis & interpretation: From the analysis of

samples we can conclude that :

1. Interest rate effect to saving decision in FD in both the

area vapi and pardi. If the interest is increase saving is
increase and if interest is decrease saving rate is
decrease.

2. Trend is neutral effect in both vapi and pardi.