Fixed income rates are completely correlated to the general interest rates in the economy. Given that we are at the higher end of the interest rate cycle, the current bank FD rates, as well as NCD rates, are multi-year highs. We have listed the interest rates offered by various banks on savings account deposits as well as fixed deposits. One must note that a bank offering the highest interest rate is not necessarily the weakest bank. Most of the time, the difference in rates between banks is on account of banks internal liquidity management. Indian Banks are well regulated by RBI and depositor's safety is very high in all these banks.

Table 1: Bank Fixed Deposit Rates

Similarly, we list below the current yields of various NCDs we consider as investment worthy. One should recollect from our article that current yield is the interest rate that you earn over the life of an NCD if you buy it today at the current price.

Table 2: Taxable & Tax-free NCD Rates

Prospero Tree view on interest rates: Given the sustained high inflation, elevated government borrowing program and weak fiscal situation, we expect the interest rates to remain at current levels over H1CY13. In the slightly longer term, interest rates will decline over FY14-15E given that excess liquidity build up on banks balance sheet and lower credit demand will gradually result in lower interest rates. Thus, it is a good time to lock money at the higher end of the interest rate curve i.e. locking money in 3-10yr maturity so that you do not run the risk of re-investing your money at lower rates as FDs mature in FY14-15E.

Important note on interest rates: The term 'general interest rates' may be difficult to comprehend as interest rates vary depending on borrower profile and his tenure of borrowing. For all practical purposes, the yield on 10-year Government of India bond is used as a benchmark interest rate. Also find below the graph of interest rates over the last 10 years.

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