Short duration fixed deposits may see upward rate revision. Experts share views on FD investment
After RBI decided to retain the repo rate at 6.5 per cent, experts said the short-term fixed deposit schemes may see an upward rate revision, while the longer-term rates may remain flat in the coming months.
- Feb 9, 2024,
- Updated Feb 9, 2024 1:38 PM IST
The Reserve Bank of India's Monetary Policy Committee on Thursday decided to the repo rate unchanged for the sixth time in a row. The repo rate stands at 6.5 per cent. The repo rate was last increased one year ago by 25 basis points (bps) on February 8, 2023, to 6.5 per cent.
The committee also decided to remain focused on the withdrawal of accommodation. On the back of this, banks may decide to further increase the rate of interests of short-term fixed deposits in a bid to attract more money. It is to be noted that past few months the loan growth has been robust and liquidity remain has been tight.
After the repo rate call, experts said the FD rates might come down later in the year, but the short-term fixed deposit schemes may see an upward rate revision, while the longer-term rates may remain flat.
Explaining the rate revision that could come in next few months, Adhil Shetty, CEO at Bankbazaar.com, said: "We’re seeing a consumer mindset shift. From a savings mindset, the consumer is moving to an investing mindset. A consequence of this shift is that more and more consumers are getting straight into mutual funds instead of savings products such as deposits. This is causing a tightening of liquidity with banks, as many industry leaders have highlighted recently. As a result, the expectation is that there will be clamour for short-term deposits with 1-year rates nudging higher and longer-term rates possibly remaining flat. Consumers, especially senior citizens, can avail these short-term rate hikes for better interest earnings.
In addition to the repo rates, financial institutions, banks and NBFCs, evaluate a multitude of other aspects in establishing their FD interest rates. If lenders have high loan-to-deposit ratios, they may increase short-term FD rates in order to attract deposits for funding credit growth. These factors, along with market conditions, liquidity, and competition, all contribute to the FD rates that banks offer.
Banks are also trying to mobilise retail deposits to meet their credit growth requirements. Several lenders in February have already raised their FD rates mostly for schemes ranging from 200 to 300 days. Four banks ― Axis Bank, Punjab National Bank, HDFC Bank, and IndusInd Bank – have increased their short-term fixed deposit (FD) rates this month.
State Bank of India managing director Ashwini Kumar Tewari told CNBC TV 18 that the deposit rates have been going up as the rate of loan growth is higher than the deposit growth for the past several quarters. The increase in loan growth, coupled with money flowing into equity markets and mutual funds, has intensified the strain on deposit accumulation and corresponding rates.
“However, this is not so much a function of the monetary policy as it is related to the demand for loans and alternative investment opportunities available to people… Deposit rates can still go up,” Tewari said.
Investment in FD schemes
FDs provide higher returns on the invested principal in comparison to the returns generated from a standard savings account. Shetty of BankBazaar.com suggests that investors can invest in FDs with different durations, such as 1-year, 2-year, 3-year, and 5-year terms. This ensures that a portion of your investment matures annually.
"FD laddering proves to be an intelligent approach to maximise the average returns on your savings. This ensures that a portion of your investment matures annually. Once the FD matures, you have the flexibility to renew it or withdraw the funds. In a low inflation scenario, you can reinvest the matured FD sum at prevailing interest rates. Conversely, if interest rates rise, you stand to gain from the higher rates. This strategy enables you to earn superior average returns compared to sticking with a single low-rate FD for an extended period. At the moment, several leading banks are offering interest rates exceeding 7% on 3-year FDs. A deposit of Rs.1 lakh in such a scheme could yield handsome gains."
Also read: Sovereign Gold Bond 2023-24 Series IV to open on Feb 12. Here are the details
The Reserve Bank of India's Monetary Policy Committee on Thursday decided to the repo rate unchanged for the sixth time in a row. The repo rate stands at 6.5 per cent. The repo rate was last increased one year ago by 25 basis points (bps) on February 8, 2023, to 6.5 per cent.
The committee also decided to remain focused on the withdrawal of accommodation. On the back of this, banks may decide to further increase the rate of interests of short-term fixed deposits in a bid to attract more money. It is to be noted that past few months the loan growth has been robust and liquidity remain has been tight.
After the repo rate call, experts said the FD rates might come down later in the year, but the short-term fixed deposit schemes may see an upward rate revision, while the longer-term rates may remain flat.
Explaining the rate revision that could come in next few months, Adhil Shetty, CEO at Bankbazaar.com, said: "We’re seeing a consumer mindset shift. From a savings mindset, the consumer is moving to an investing mindset. A consequence of this shift is that more and more consumers are getting straight into mutual funds instead of savings products such as deposits. This is causing a tightening of liquidity with banks, as many industry leaders have highlighted recently. As a result, the expectation is that there will be clamour for short-term deposits with 1-year rates nudging higher and longer-term rates possibly remaining flat. Consumers, especially senior citizens, can avail these short-term rate hikes for better interest earnings.
In addition to the repo rates, financial institutions, banks and NBFCs, evaluate a multitude of other aspects in establishing their FD interest rates. If lenders have high loan-to-deposit ratios, they may increase short-term FD rates in order to attract deposits for funding credit growth. These factors, along with market conditions, liquidity, and competition, all contribute to the FD rates that banks offer.
Banks are also trying to mobilise retail deposits to meet their credit growth requirements. Several lenders in February have already raised their FD rates mostly for schemes ranging from 200 to 300 days. Four banks ― Axis Bank, Punjab National Bank, HDFC Bank, and IndusInd Bank – have increased their short-term fixed deposit (FD) rates this month.
State Bank of India managing director Ashwini Kumar Tewari told CNBC TV 18 that the deposit rates have been going up as the rate of loan growth is higher than the deposit growth for the past several quarters. The increase in loan growth, coupled with money flowing into equity markets and mutual funds, has intensified the strain on deposit accumulation and corresponding rates.
“However, this is not so much a function of the monetary policy as it is related to the demand for loans and alternative investment opportunities available to people… Deposit rates can still go up,” Tewari said.
Investment in FD schemes
FDs provide higher returns on the invested principal in comparison to the returns generated from a standard savings account. Shetty of BankBazaar.com suggests that investors can invest in FDs with different durations, such as 1-year, 2-year, 3-year, and 5-year terms. This ensures that a portion of your investment matures annually.
"FD laddering proves to be an intelligent approach to maximise the average returns on your savings. This ensures that a portion of your investment matures annually. Once the FD matures, you have the flexibility to renew it or withdraw the funds. In a low inflation scenario, you can reinvest the matured FD sum at prevailing interest rates. Conversely, if interest rates rise, you stand to gain from the higher rates. This strategy enables you to earn superior average returns compared to sticking with a single low-rate FD for an extended period. At the moment, several leading banks are offering interest rates exceeding 7% on 3-year FDs. A deposit of Rs.1 lakh in such a scheme could yield handsome gains."
Also read: Sovereign Gold Bond 2023-24 Series IV to open on Feb 12. Here are the details