RBI policy: Depositors can continue to enjoy high FD rates for now

With the rise in the lending rate of banks, there has been a simultaneous increase in fixed deposit rates as well. As of now, many banks are offering FD interest as high as nine per cent

Depositors will continue enjoying higher interest rates on their fixed deposits for now as the  Reserve Bank of India left the key repo rate unchanged at 6.5 per cent for the fifth time in a row, on 8 December 2023.  

Repo rate is the rate at which the central bank lends money to commercial banks. There is a direct link between repo rate and interest rates on various savings instruments, including the fixed deposits (FDs). As the repo rate goes up, so does the FD interest rate, and vice versa when the repo rate drops. Banks often revise the interest rates based on the change in repo rate.

As the RBI has kept the repo rate unchanged, the banks are unlikely to further revise the FD rates. 

Risk averse investors should stay locked in with higher FD rates

The anticipation of the RBI maintaining the repo rate at 6.5 percent in its monetary policy meeting has prompted some banks to already increase their FD rates. This continues the trend seen in the past, where risk-averse investors benefit by securing their funds in higher FD rates. This current pattern suggests that banks are aligning their FD rates with the changes in the policy rate.

"We expect that the key policy rates will come down post-Q2 2024. Gradually, the market will start factoring this, which will have a downward impact on the FD returns of various banks, small finance banks, and NBFCs. Given the context, this is the best time to lock your money into high-return FDs. Small finance banks are a good choice as they offer about 1-2% per annum extra interest compared to most established banks, said  Anshul Gupta, Co-Founder and Chief Investment Officer, Wint Wealth.

Opt for laddering strategy

"Should the repo rate remain unchanged, FD rates would likely stay higher, offering investors the opportunity to secure their funds at elevated rates. They might employ a laddering strategy, breaking their FDs into multiple amounts and tenures. This strategy aims to capitalize on varying interest rate fluctuations, allowing investors to earn higher interest rates when these rates change," said Adhil Shetty, CEO of Bankbazaar.

Stay away from floating FDs 

Some banks are trying to sell floating-rate FDs. A floating rate term deposit (FRTD) is a type of fixed deposit (FD) in which the interest rate changes in lockstep with a reference rate that is adjusted on a regular basis, rather than being fixed for the duration of the deposit.  "Investors would do well not to invest in these FDs, as the interest rates are expected to decrease in the near future," added Gupta. 
 

RBI data shows that about Rs 10.27 trillion was locked in bank deposits in fiscal year 2023. A study by Kotak Institutional Equities suggests that we are moving closer to peak deposit rates for the system.

Among the maturity period, term deposit mobilisation in the one- to three-year category exhibited healthy performance, with deposits rising to Rs 69.39 trillion in September 2023 from Rs 61.18 trillion in March 2023.

The data shows that in the reported quarter, 50 per cent of term deposits continue to be 7-8 per cent, compared to the share of 20 per cent in Q4FY23. Similarly, 28.61 per cent of consumers parked their funds in the range of 6-7 per cent interest rate during Q2FY24.

Since May 2022, the Reserve Bank of India (RBI) has implemented six successive repo rate hikes, resulting in a cumulative increase of 250 basis points. In the last four bi-monthly monetary policy meetings, the RBI chose to pause the repo rate at 6.5 per cent. The last revision was in February 2023.

Currently, many small finance banks are offering FD interest as high as nine per cent while private and public banks are offering FDs in the range of 7-.7.5 per cent Fixed deposits are widely regarded as a low-risk investment choice. 

As the RBI decides to keep the policy repo rate unchanged look at the list of current FD interest rates offered by banks complied by Paisabazaar:

Some small finance banks (SFBs) are offering up to nine per cent interest rates on fixed deposits to attract investors. Leading the pack is Unity Small Finance Bank, offering an interest rate of 9.5 per cent to senior citizens for a fixed deposit for 1001 days as of December 6, 2023. 

 

Interest rates on senior citizen fixed deposits offered by other SFBs, like Equitas Small Finance Bank, Esaf Small Finance Bank, Survoday Small Finance Bank, Jana Small Finance Bank, Fincare Small Finance Bank, and Utkarsh Small Finance Banks range from 9 to 9.11 per cent. 

 

Regular fixed deposits are also providing up to a nine per cent interest rate led by Unity Small Finance Bank. Others like Equitas Small Finance Bank, Esaf Small Finance Bank, Survoday Small Finance Bank, Jana Small Finance Bank, Fincare Small Finance Bank, and Utkarsh Small Finance offer returns ranging from 8.61 per cent to 7.60 per cent. 

Private banks

Leading private banks like ICICI Bank and HDFC Bank offer over 7.5 per cent interest on senior citizen FDs. However, the highest interest is offered by SBM Bank at 8.75 per cent for a period above three years two days to less than five years. 

 

For Regular fixed deposits private banks are offering interest rates ranging from 8.25 per cent to seven per cent. 

 

 

Public sector banks

Leading PSBs like SBI and Bank of Baroda offer over 7.6 per cent interest on senior citizen FDs. However, the highest interest is offered by Punjab and Sinde Bank at 7.9 per cent for a period above 444 days. 

 

For Regular fixed deposits PSBs are offering interest rates ranging from 7.40 per cent to seven per cent as of December 6, 2023. 

 

Foreign banks also provide fixed deposit facilities with interest rates as high as eight per cent.