Is this the right time to lock in high rates in fixed deposits and G-Secs?

The highest rates in major banks hovered between 7% and 8%, while some smaller finance banks offered upwards of 9% interest.
The highest rates in major banks hovered between 7% and 8%, while some smaller finance banks offered upwards of 9% interest.

Summary

  • FD interest rates in India have been on an upswing for investors since RBI began hiking the repo rate in May 2022.

Fixed deposit (FD) interest rates in India have been on an upswing for investors since the Reserve Bank of India (RBI) began hiking the repo rate in May 2022. This is important because from an individual investor’s perspective, when the repo rate go up, FD interest rates go up; when the repo rate is cut, interest rates inevitably trend downward. RBI raises the repo rate when it wants to counter inflation. Between May 2022 and February 2023, the central bank raised the repo rate six times, by a cumulative 2.5 percentage points, taking it to 6.5%. The monetary policy committee (MPC) of RBI has not hiked the rate any further in the last 12 months, leading to speculation that we may see a cut in the repo rate and, consequently, interest rates. That raises a pertinent question: is this the right time to lock in rates in FDs and government securities G-Secs?

FD interest rates have had a good run

Interest rates on fixed deposits saw an uptick after the repo rate hikes. The highest rates in major banks hovered between 7% and 8%, while some smaller finance banks offered upwards of 9% interest. What did that mean for the average Indian investor who favoured the safety of FDs? Medium-term deposits (2–3 years) saw a larger uptick in interest rates, with some banks offering as much as 7% interest by late 2023, or a 1.5-1.8 percentage point increase compared to early 2022. Short-term deposits saw slightly lower hikes in interest rates, while longer-term deposits (5 years or more) saw an approximately 1% hike in interest rates.

The upward trend over the last few years means that these rates are the best they’ve been in around 4 years. So, is this as good as it will get for FDs in the foreseeable future? To answer that all-important question, we need to see what the MPC decides in its upcoming meeting.

A glimpse into the immediate future

With the central bank governor remaining non-committal about rate cuts, experts do not see the status quo on the repo rate being disturbed in the coming months. Combined with the downward trend in inflation, that could mean interest rates are currently at their peak. Now would be a good time to lock in FD interest rates, especially for senior citizens who can avail higher interest rates. Another way to lock in these rates for a longer duration is through recurring deposits (RDs).

Let’s take an example to explain this. Say you invest 5 lakh in January in an FD at an interest rate of 7% for a period of three years. That would yield an interest of 1,15,720 over the full three-year term, giving you a maturity amount of 6,15,720. That’s a nice little profit you would have made. With the growing talk of rate cuts and drop in interest rates, an FD in 2025 could see lowered interest rates. So, if you invest 5 lakh after the ‘peak’, say, at an interest of 6%, your investment will fetch you returns of 97,809. So, in our example, by not locking in interest rates at the peak, you could potentially miss out on income of 17,911. That’s a considerable amount.

Alternatively, an RD of 10,000 a month for 10 years at a 7% interest rate started today will fetch a maturity amount of 17,37,012 (approximate and pre-tax). The same maturity amount would be 16,44,295 if the interest rate is 6%. The difference is significant. If the rate of interest is 7.5%, then the maturity amount is 17,85, 761.

We need to remember that in an RD, we lock in the interest rate for the entire period. So, there is a significant advantage with long-term RDs if we initiate the same when the interest rates are high.

This may be the right time to invest in G-Secs

Similarly, the interest rate on G-Secs is around 7%. Following JPMorgan’s decision to list Indian government bonds or G-Secs in its emerging markets index starting in June, the cost of borrowing for the government is expected to come down. That could lead to higher foreign portfolio investments (FPIs) in India. Increased demand for G-Secs means their prices could go up, leading to lower yields. As the inflation rate drops and FPI inflows rise, RBI may well choose to drop the interest rate below 7%. So, this might be the right moment for investors to lock in their G-Secs investments at higher interest rates.

Anshul Arzare is managing director and chief executive officer, YES Securities.

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