The recent cycle of rising interest rates on fixed deposits (FDs), which started in May 2022, is close to its end. In fact, many banks have started reducing FD interest rates. The Reserve Bank of India (RBI) paused the benchmark repo rate for the third consecutive time in the August Monetary Policy Committee (MPC) meeting. Further, the decision to withdraw Rs 2,000 notes from circulation created surplus liquidity in the banking system and helped in keeping in check the rise in interest rates on FDs. With the dream run of interest rate hikes on FDs almost coming to an end, how should you invest in FDs now?
Why banks are reducing interest rates on FDs
As retail inflation had dropped below the central bank’s upper threshold of 6 per cent in April, May and June, the RBI put a brake on repo rate hike. This was the third time that the RBI maintained a status quo in the key lending rates this year. This move came after a series of hikes in repo rate, by overall 250 basis points from 4 per cent to 6.5 per cent, within a short span of 11 months. The possibility of any further repo rate hike in the near future is very unlikely. “Further, a stable repo rate seems to be on the cards for the foreseeable future,” says Mayank Bhatnagar, Chief Operating Officer, of FinEdge. The withdrawal of Rs 2,000 notes from circulation has strengthened liquidity in the banking system. The cooling of bond yields over the last few months has also impacted deposit rates. “The projected moderation in credit growth for the current fiscal year implies that banks should be adequately positioned to support credit expansion with their existing deposit inflow, potentially easing the need for further rate hikes to attract deposits,” says Saurabh Jain, Co-Founder at Stable Money. All these factors indicate that FD rates have peaked and will start declining soon, he adds.
Will FD rates go down further in the near future?
DCB Bank slashed interest rates on its fixed deposits by up to 50 basis points this month. Among other banks, Axis Bank, Bank of India, Punjab National Bank (PNB) and IndusInd Bank have also cut interest on fixed deposits recently.While there may be a temporary liquidity deficit in the banking system due to incremental CRR action, a repo rate hike may not be the response from the RBI; the central bank may rather go for other short-term tools to infuse liquidity in the system. As the liquidity improves in the banking sector, more banks may start reducing interest rates as they are no longer required to offer high rates on deposits to attract investors, say experts. “Given the current macroeconomic environment, the RBI may start reducing the key interest rates in the next calendar year, and the banking sector will gradually start factoring it in. Therefore, FD rates may fall in FY24,” says Anshul Gupta, Co-Founder and Chief Investment Officer, Wint Wealth.
How to choose your FD tenure amid falling FD interest rates
If you are planning to invest in an FD, you may book it now as the rates have reached a level where the scope of a significant hike in the near future is remote. Now, how should you choose the tenure of your FD to get the best return?
“Most banks are providing robust interest rates in the 18 months to less than three years tenure. In this short-term tenure, you can stand to avail interest of around 7-7.20 per cent, which is on a par with or even 10 basis points higher than the rates available on longer tenure deposits,” says Raghvendra Nath, MD of Ladderup Wealth Management. Senior citizens will be able to lock in a three-year FD at 7.5 per cent or more at most public and private sector banks, says Bhatnagar.
If your investment horizon is a short-to-medium term, you may book your FDs them now, suggests Dev Ashish, a SEBI-registered investment advisor and founder of StableInvestor.com.
For better returns from FDs in the long run, try FD laddering
If you want to avoid lower return from your FDs in the long run, you may go for FD laddering. Instead of putting the entire money in a single FD, you can break it into parts and invest in various tenures. “Laddering fixed deposits is a way to stagger your investments into multiple accounts of varying intervals to earn high returns with regular liquidity,” says Adhil Shetty, CEO, Bankbazaar.com.
Let’s assume you have a total investment amount of Rs 6 lakh that you want to invest in fixed deposits. Divide this amount into three equal parts of Rs 2 lakh each. Thereafter, you can invest in fixed deposits with varying maturity periods. You can put Rs 2 lakh in a short-term FD (1.5 to 2 years), another Rs 2 lakh in a medium-term FD (3 to 5 years), and Rs 2 lakh in the tenure offering the highest interest rate. This way, if you need funds after a year and a half, you can rely on the FD that will mature in the short term. A medium-term FD will help you to lock in the high-interest rate available at the moment.
Laddering of fixed deposits also mitigates the risk of reinvestment, says Vishal Dhawan, founder of Plan Ahead Wealth Advisors. If you invest all your money in deposits of similar tenures, then all your FDs will mature at the same time. If that maturity coincides with a low-interest rate cycle, you might have to reinvest all your money into low-interest rate options when the deposits mature, Dhawan says.
With a laddering strategy of fixed deposits, if banks increase FD rates shortly, you can cash in on that too, says Abhishek Kumar, a SEBI-registered investment advisor and and Founder of SahajMoney.
Small finance banks offer up to 9% on FDs: Should you book?
Small finance banks are still offering 8.5-9 per cent interest rates on fixed deposits of select tenures. For senior citizens, it can go up to as high as 9.5 per cent on odd-tenures. Consumers seeking higher FD rates can consider small finance banks and private sector banks, says Naveen Kukreja, Co-Founder and CEO, Paisabazaar.
If you are ready to invest in small finance banks, book FDs offering the highest interest rate, even if it is for an unconventional tenure, says Dev Ashish. However, it is better to go for a longer tenure in small finance banks as you can lock in the FD at a higher rate for a longer period, he adds.
Do remember to not overexpose yourself to small finance bank deposits to get attractive interest rates. Keep your overall allocation to fixed income in mind while allocating to small finance bank deposits as well, says Dhawan. If you have earmarked a total fund for FDs, do not invest more than 30 to 40 per cent in FDs of small finance banks, say experts. As you get the deposit insurance cover of Rs 5 lakh on FDs in small finance banks also, it is better to book your FDs in multiple banks and in the name of different family members to maximise the insurance cover.
