In a serious effort to support the falling rupee and to tame the rising inflation, the Reserve Bank of India (RBI) has been hiking interest rates at every Monetary Policy Committee meeting since May. There have been four straight rate hikes so far, resulting in a total repo rate hike of 190 bps. Consequently, banks have followed suit and raised interest rates on their lending as well as deposit rates.
Although the rates on fixed deposits (FD), which is currently hovering around 5.5 percent to 6 percent, still ranged significantly lower than the rate of inflation, it has gradually started moving up, showing a positive trend for the FD holders. However, the analyst community hasn't yet seen it as an ideal investment option in terms of returns.
| Name of Bank | For General Citizens (p.a.) | For Senior Citizens (p.a) |
| State Bank of India (SBI) | 3.00% to 6.10% | 3.50% to 6.90% |
| HDFC Bank | 3.00% to 6.25% | 3.50% to 7.10% |
| ICICI Bank | 3.00% to 6.60% | 3.50% to 6.95% |
| IDBI Bank | 3.00% to 6.25% | 3.50% to 7.00% |
| Kotak Mahindra Bank | 2.75% to 6.50% | 3.25% to 7.00% |
| RBL Bank | 3.25% to 7.25% | 3.75% to 7.75% |
| Punjab National Bank | 3.50% to 7.00% | 4.00% to 7.50% |
| Canara Bank | 3.25% to 7.00% | 3.25% to 7.50% |
| Axis Bank | 3.50% to 6.50% | 3.50% to 7.25% |
(Source: Bankbazaar)
So, are FDs worth investing now?
According to Abhinav Angirish, Founder, Investonline.in, putting money into fixed deposits at the bank isn't quite exciting as it seems now.
"FDs offer modest returns, and their inflation-adjusted returns are much worse. As a result, it would not be appropriate to view them as a substitute for equity investments. As a typical debt asset, term deposits ( another name for FD) aid in capital preservation (Debt funds are better option) while equities aid in the long-term generation of high real returns," he told CNBC-TV18.com.
The purpose of any investment should be to fulfil present and future needs. Most people consider bank fixed deposits to be risk-free investment. However, is it truly risk-free?
According to Angirish, even if banks have increased the interest rates on
fixed deposits, neither the pre-tax nor the post-tax returns are sufficient to keep up with the pace of inflation.
Assuming that one does not fall in tax bracket, if the interest rate on a fixed deposit is 6.50 percent per year and inflation in India is around 7 percent per year, the inflation-adjusted return one will earn is -0.47 percent per year.
Angirish thinks that fixed deposits are a good option only for investors with relatively low risk tolerance levels and who want to start saving for goals that are fewer than three years away. "Debt funds offer indexation benefits and ensure a lower tax outgo when compared to term deposits. Remember, the interest earned on term deposits is fully taxable and one has to pay the tax according to one's tax slab. Term deposits ought to be seen more as a saving product than as an investment product and hence, it is suitable for only those with extreme risk-aversion and not caring about real returns," he said.
Though the interest rates are high they are much lower than what they were a few years ago when the rates were as high as 10 percent.
"Having said this, one will have to analyze the post-tax returns from term deposits vis-a-vis other investment options to see whether the term deposits are beneficial to him. On the income tax side, interest on term deposit will be taxable but deduction also can be claimed (up to Rs 50,000 in a financial year or actual income earned, whichever is less)," said Anita Basrur – Partner, Direct Tax at Sudit K Parekh & Co. LLP.
Will FD rates rise further?
“Though the inflation rate is currently higher than the FD rate, it will take a few more months for the two to catch up, “ saidAngirish.
Worldwide inflation has remained high for a number of reasons, including supply-side restrictions and the current Russia-Ukraine conflict.
"Accordingly, there is a strong likelihood of yet another interest rate increase being implemented in December. It's also anticipated that market liquidity would remain tight over the next few months. Therefore there is a strong possibility that the FD rates might increase even further in the months to come,” Angirish told CNBC-TV18.com.
(Edited by : CH Unnikrishnan)
