Two-year FDs fetch more than 5-yr deposits

Banks are offering their highest returns in the one to two-year category of deposits, an indication that they expect interest rates to come down in the medium term. A host of banks have revised their lending and deposit rates but are reserving the most-attractive returns on the medium-term fixed deposits.  The highest rate offered by the country's largest lender, State Bank of India, is 9% and this is the return on its 555-day and 1,000-day deposits. But those who decide to keep their money for a longer term will less. A five-year deposit with SBI will fetch only 8.25% while the return on 10-year deposits is 8.75%. Conventional economics says that rates rise along with tenure, and the current pricing of deposits appears to be an anomaly. But bankers have an explanation for this.  They say there are two reasons for why medium-term rates are higher. The first is that they believe that inflation would come down which would make lower fixed deposit rates more acceptable in the next year. Secondly, they say that it is impossible to predict future rates and since most of their loans are extended on floating rates, they would rather have the option to reprice deposits after a year.  Meanwhile, more banks have increased their lending rates. in the wake of the 0.25% increase in policy rates by the Reserve Bank of India even as the liquidity position eased marginally in the money markets.