Lock into best fixed deposit rates for up to a three-year tenure

HDFC Bank recently launched special edition fixed deposit (FD) schemes for its customers, offering higher interest rates than its peers for 35-month (7.35 per cent) and 55-month (7.4 per cent) tenures. Senior citizens will receive an additional 50 basis points over these rates. 

 

Bridging asset-liability mismatch
 

Banks have deposits maturing at regular intervals. But sometimes the amount maturing at the same time is high. “When a bank anticipates higher liquidity requirements, it offers higher rates on FDs maturing around that time to attract more deposits,” says Adhil Shetty, chief executive officer (CEO), Bankbazaar.
 

Besides the repo rate, banks consider the gap between the growth in deposit mobilisation and credit demand when setting FD rates. 

 

 

“Banks falling short of their deposit mobilisation targets increase their FD rates to attract incremental deposits for funding their credit growth,” says Gaurav Aggarwal, chief business officer (unsecured lending), Paisabazaar. 
 

Special tenure rates also tend to catch customers’ attention in a way that standard tenures like six months and one year do not.

 

Peak rates
 

Experts believe the repo rate has peaked. “FD rates are likewise close to the top,” says Ravi Jain, co-founder and managing director, Blostem.
 

Shetty, while agreeing that FD rates have almost peaked, adds there is always the possibility that a few banks might come up with special-tenure offerings. However, he rules out the possibility of FD rates rising considerably from current levels across banks and tenures.

 

Lock into current rates
 

Experts say the current rates offer a good opportunity to lock in money. “Many private-sector banks like RBL, DCB, SBM, and Yes, and most small finance banks, are offering FD yields of 8 per cent and above. Depositors seeking higher returns from fixed-income instruments may use their surpluses to book these high-yield FDs,” says Aggarwal.
 

Allocating to FDs is crucial with the equity markets, which are trading at elevated valuations, turning volatile in recent days. “Allocating to FDs will diversify your holdings and lower risks while offering steady guaranteed returns,” says Jain.

 

What should your strategy be?

Many investors may consider locking into the highest-yielding FD for the longest-available tenure. Doing so will allow them to earn higher interest income even after the interest-rate regime reverses. However, bear in mind that FDs are not advisable for long-term wealth creation as their post-inflation, post-tax returns are not very attractive. 
 

Investors with a horizon longer than three years may be better off opting for hybrid mutual funds (for three to five years) or equity funds (for five years or more). The sweet spot may lie in finding the best rate for up to a three-year tenure. Investors may also consider short-term FDs for parking short-term surpluses. 
 

“Compare the rates on short-term FDs with the rates available on high-yield savings accounts of several private-sector banks, many of which offer up to 7 per cent and more, depending on the balance in the account. Such high-yield savings accounts would offer higher liquidity and flexibility than short-term bank FDs,” says Aggarwal. Finally, should you go for the special rates offered by FDs of specific tenures? Consider them if your horizon matches the tenure of these instruments, suggests Jain.