The Reserve Bank of India (RBI), in its bi-monthly monetary policy, recently decided to keep the repo rate unchanged, which suggests that fixed deposit (FD) interest rates are not likely to increase further. However, experts say that FD rates are influenced by several factors including repo rate, the gap between the credit growth rates, deposit growth rates and overall liquidity in the banking system. This means that a pause in the repo rate doesn’t necessarily mean a hike in FD interest rates would halt immediately.
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The silver lining for investors
According to Naveen Kukreja, Co-founder & CEO of Paisabazaar, banks would usually continue to increase FD rates as long as their credit growth rate is significantly higher than the deposit growth rate, to attract more deposits that can be used to lend out.
"Also, while the pause in repo rate should lead to a pause in the increasing interest rates for loans, the same cannot be said with certainty for FD interest rates. Even during periods of rising policy rates, there is often a time lag between the rising policy rates and its transmission to FD rates," Kukreja told CNBC-TV18.com.
On top of this, the current FD rates are still appealing enough for investors to consider them as an investment option.
The strategy
Regardless of changes in the repo rate, Kukreja said that those with existing FDs should continue with their FDs till maturity.
"Opt for a premature FD closure only if there is a significant gap between the effective rate on their existing FD and rates on their new FD. Do not forget to factor in the premature withdrawal penalty while calculating the effective rate on your existing FD," he said.
For those who are planning to open fresh FDs, they should compare FD rates from as many banks as they can. Currently, several small finance banks along with a few private sector banks are offering the highest FD slab rates of 7.5 percent or above.
"Decide on the tenure based on investment horizon and FD slab rates. Opt for longer tenures only if its rates offered are significantly higher than medium-term or shorter tenures," Kukreja told CNBC-TV18.com.
Notably, deposits up to Rs 5 lakh in all scheduled banks, which includes small finance banks, are covered under the Depositor Insurance Program of DICGC, an RBI subsidiary. This insurance program covers each depositor of each scheduled bank for cumulative deposits (including fixed, current, savings and recurring deposits) of up to Rs 5 lakh.
Those seeking highest possible capital protection on their deposits can choose to spread their deposits with multiple scheduled banks to ensure the cumulative deposit with each scheduled bank does not cross Rs 5 lakh.
Also, one does not know whether the rate hike cycle has already ended or will continue for more time to come. Another alternative, therefore, is to opt for fixed deposit (FD) laddering.
Fixed deposit laddering is a process of spreading investment in FDs over multiple maturity tenures or maturity buckets, whereby investors hold the chance to earn a higher return and even address the liquidity needs.
Explore other options
While FDs may be suitable for investing some amount of savings as a safety margin, Shiv Parekh, Founder at hBits said that consumers should also explore new-age investment options that are asset-backed and can combat growing inflation.
"It is advisable to conduct a net benefit analysis before making any investment decisions. Retail investors today seek steady investment options that offer considerably good returns," Parekh told CNBC-TV18.com.
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