Fixed Deposit (FD) is one of the most popular ways of investment in India. Apart from ensuring a guaranteed return and offering higher interest rates than savings accounts, FDs also offer income tax benefits. At present, some of the banks, apart from small finance banks are offering lucrative interest rates. DCB Bank is offering the highest FD interest rate of 8% to general customers. Well, personal finance experts believe that the regime of high bank FD interest rates, which kickstarted in May 2022 after the Reserve Bank of India (RBI) raised interest rates six times continuously, may not last for long.
Why high bank FD interest rates may not last for long
RBI on December 8 kept the repo rate unchanged at 6.5 per cent. This is the fifth time in a row that the central bank has decided to keep the key benchmark policy rate unchanged. Additionally, the US Federal Reserve kept the key interest rates unchanged and foresees three rate cuts next year. The Fed has raised rates 11 times since March 2022 to combat high inflation. The interest rates on fixed deposits and other savings schemes are revised with a change in the repo rate.
How repo rates impact FD rates
When the repo rate increases, banks start passing on the rate hike to customers, as a result, FD interest rates see a h, and when the repo rate decreases, FD interest rates decline as well.
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How can FD investors benefit from such a scenario?
Fixed deposits have also witnessed greater interest following the rate hikes. “Customers can lock in their money in FDs of shorter tenures offering higher returns,” said Adhil Shetty, CEO, of BankBazaar.com.
“However, it will be advisable to take advantage of the current high rates and book your FDs as soon as possible if you are planning to go for short- to medium-term FDs with tenure of up to 3 years, as there is a greater likelihood that rates will drop in such FDs,” said Abhijit Roy, CEO, GoldenPi.
Personal Finance experts suggest that investors seeking to invest in bank fixed deposits for a longer period may consider a ladder strategy.
“To maximise returns, they can also explore strategies such as laddering,” suggested Adhil Shetty.
Bank FD laddering is a technique that involves buying multiple FDs maturing in different periods.
Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Published: 14 Dec 2023, 12:35 PM IST