RBI repo rate pause: Is it an excellent time to invest in FDs as interest rates may be close to peak?
While some experts say investors could lock in FDs for six months, others suggest looking at T-Bills and G-Secs
- Jun 8, 2023,
- Updated Jun 8, 2023 1:45 PM IST
In line with broad expectations, the Reserve Bank of India (RBI) kept the repo and reverse repo rates unchanged while concluding the three-day Monetary Policy Committee (MPC) on Thursday. Since May 2022 the central bank has increased the repo rate six times and by a cumulative 250 bps to 6.50 per cent.
Following the rise in repo rate, most banks have revised interest rates on fixed deposits (FDs), too. But now, as the interest rates are expected to cool, the question arises if it is a good time to lock your money in an FD to cash in on the higher interest rates?
“The outcome (of today’s MPC) further validates the belief that we are closer to the end of the rate hike cycle. From retail investors’ standpoint, this is an excellent time to lock in fixed deposits because interest rates may be close to their peak,” said Anshul Gupta, Co-founder and Chief Investment Officer, Wint Wealth.
At present, for a tenure of 1-2 years, State Bank of India offers a 7.1 per cent interest on FD, while for a term of 5 years Suryoday Small Finance is offering 9.10 per cent.
“RBI lowered inflation target by 0.1 per cent, and for now has anchored the repo rate at 6.5 per cent. This means FD and small savings schemes might not see further upside in rotating shorter maturities. Some time ago, it made sense to keep FDs in auto-renew for 30-day tenure to take advantage of rising rates, but now we might look at locking in these rates for a longer maturity. That said, we have a general election, and elections are usually inflationary in nature. Hence, the next 12 months when this plays out, we could see some upward revision if inflation surprises us on the upside. The next state elections are around December 2024, so till then it makes sense to lock FD rates. I would call this an accommodative stance, given that inflation is still above target RBI rates. But I believe they have more insights and perhaps expect inflation to cool further. If that’s the case, long-dated government bond mutual funds will also do well in such a scenario," says Abhishek Banerjee, Founder & CEO, Lotusdew Wealth and Investment Advisors.
Bond markets, on the other hand, have already discounted rate cuts and 10-year government security (G-Sec) yields have already fallen by more than 50 bps since September.
On November 7, Nithin Kamath, founder of Zerodha, tweeted that individuals can consider investing in G-Secs and treasury bills (T-bills) due to the significantly higher interest rates they offer. According to the data provided by Kamath, T-bills offer higher interest rates on bank FDs. The interest rates on T-bills are 6.47 per cent for a tenure of 91 days, 6.8 per cent for 182 days, and 6.95 per cent for 364 days. In contrast, banks’ FD rates do not exceed 6 per cent.
Similarly, corporate bonds are currently providing significantly higher rates compared to FDs. For instance, while corporate bonds are offering a rate of 9-11 per cent, FDs are offering an average interest rate of 6-9 per cent for a tenure of one to three years. While the higher returns are appealing, it's crucial to recognise that corporate bonds carry more risk than FDs. These bonds entail both credit and interest risk. Therefore, it is important to carefully assess the credit quality of the issuer before investing or consider investing in them.
In line with broad expectations, the Reserve Bank of India (RBI) kept the repo and reverse repo rates unchanged while concluding the three-day Monetary Policy Committee (MPC) on Thursday. Since May 2022 the central bank has increased the repo rate six times and by a cumulative 250 bps to 6.50 per cent.
Following the rise in repo rate, most banks have revised interest rates on fixed deposits (FDs), too. But now, as the interest rates are expected to cool, the question arises if it is a good time to lock your money in an FD to cash in on the higher interest rates?
“The outcome (of today’s MPC) further validates the belief that we are closer to the end of the rate hike cycle. From retail investors’ standpoint, this is an excellent time to lock in fixed deposits because interest rates may be close to their peak,” said Anshul Gupta, Co-founder and Chief Investment Officer, Wint Wealth.
At present, for a tenure of 1-2 years, State Bank of India offers a 7.1 per cent interest on FD, while for a term of 5 years Suryoday Small Finance is offering 9.10 per cent.
“RBI lowered inflation target by 0.1 per cent, and for now has anchored the repo rate at 6.5 per cent. This means FD and small savings schemes might not see further upside in rotating shorter maturities. Some time ago, it made sense to keep FDs in auto-renew for 30-day tenure to take advantage of rising rates, but now we might look at locking in these rates for a longer maturity. That said, we have a general election, and elections are usually inflationary in nature. Hence, the next 12 months when this plays out, we could see some upward revision if inflation surprises us on the upside. The next state elections are around December 2024, so till then it makes sense to lock FD rates. I would call this an accommodative stance, given that inflation is still above target RBI rates. But I believe they have more insights and perhaps expect inflation to cool further. If that’s the case, long-dated government bond mutual funds will also do well in such a scenario," says Abhishek Banerjee, Founder & CEO, Lotusdew Wealth and Investment Advisors.
Bond markets, on the other hand, have already discounted rate cuts and 10-year government security (G-Sec) yields have already fallen by more than 50 bps since September.
On November 7, Nithin Kamath, founder of Zerodha, tweeted that individuals can consider investing in G-Secs and treasury bills (T-bills) due to the significantly higher interest rates they offer. According to the data provided by Kamath, T-bills offer higher interest rates on bank FDs. The interest rates on T-bills are 6.47 per cent for a tenure of 91 days, 6.8 per cent for 182 days, and 6.95 per cent for 364 days. In contrast, banks’ FD rates do not exceed 6 per cent.
Similarly, corporate bonds are currently providing significantly higher rates compared to FDs. For instance, while corporate bonds are offering a rate of 9-11 per cent, FDs are offering an average interest rate of 6-9 per cent for a tenure of one to three years. While the higher returns are appealing, it's crucial to recognise that corporate bonds carry more risk than FDs. These bonds entail both credit and interest risk. Therefore, it is important to carefully assess the credit quality of the issuer before investing or consider investing in them.