BackTime to rejig your fixed deposit (FD) investment. What experts say
Investors in term deposits are now unsure as to whether interest rates for FDs have reached their peak in the present cycle or if it will take some time
PremiumThe Reserve Bank of India (RBI) has decided to halt interest rate hikes, signaling that the interest rate cycle may have reached its peak. The recent announcement by RBI Governor Shaktikanta Das did not go well with fixed deposit (FD) investors, who were eyeing further rate hike by the banks. Investors in term deposits are now unsure as to whether interest rates for FDs have reached their peak in the present cycle or if it will take some time. Since May 2022, the Reserve Bank of India (RBI) has hiked the repo rate by 2.5%.
Amit Gupta, MD, SAG Infotech said that for fixed-income investors, who were struggling with historically low interest rates only a year ago, are now looking forward to the advantages of previous significant increases in the repo rate, which will presumably be passed on to bank FDs.
Have interest rates for FDs have reached their peak
Gupta said that although opinions on peak rates are divided, it is clear that now is a good time for foreign direct investors to assess their holdings. Selecting the optimum strategy for FD investment requires careful consideration of the expected direction of FD rates.
No further rate increase this year?
Nirav Karkera, Head of Research, Fisdom said that it is expected that the central bank will pause for an extended period. However, a further deterioration on the inflation front could make a case for another rate hike, with the quantum being influenced by the transmission of the cumulative policy rate hikes in the current cycle. The current environment is characterized by a robust credit demand, and banks may need to spruce up their time deposit offerings with higher rates due to an apparent insufficiency of funds to service this demand.
“The competitiveness among banking peers will only make the case stronger for higher deposit rates. With increased rates by other small saving investment instruments, banks may need to step up their interest offerings to secure higher deposits," he added.
As per Amit Gupta, considering the trajectory of interest rates, it is already obvious that the final repo rate will be 6.5%, and no further rate increases are anticipated this year, notwithstanding any statements made by the RBI about the potential of extra policy actions.
Should you break your FD?
It may be a smart idea to break an old, long-term fixed-income investment (FD) now and reinvest the proceeds, especially if there is still a significant amount of time left on its term, said Amit Gupta. Therefore, it is imperative to do a net benefit analysis before making any decisions.
In addition to offering rates that are much higher than those offered by larger banks, smaller private banks and small financing organisations have been quicker to announce interest rate increases. If you wish to benefit from the higher interest rates offered by these riskier institutions, you must be sure that the ₹5 lakh in deposit protection provided by DICGC will appropriately cover your exposure.
Long tenure deposits do not offer as attractive rates of interest
Many leading private and public banks have already increased their interest rates for medium-term deposits of up to three years on average. However, longer tenured deposits do not offer as attractive rates of interest, and it may take some time before higher rates percolate to the longer tenured deposits, said Nirav Karkera.
FD investors should consider ladder strategy
Meanwhile, investors seeking to invest in bank fixed deposits for a longer period may consider a ladder strategy. This involves dividing the investible amount into three or four tranches, differing in terms of amounts and periods. An investor can decide the amounts and periods basis own expectations. However, it would be a good starting point to hold almost half of the corpus in very near-term deposits of probably three to six months. This offers flexibility to reinvest at higher rates as interest rates transmit more effectively over the next couple of months, while also having the opportunity to decide basis the next MPC meeting outcome. For the residual capital, a ladder of one, two, and three years should offer investors the upside of locking in higher rates while having the flexibility to reinvest at potentially higher rates as the near-term deposits mature. Those with a clear time horizon may seek to optimise the investment tenure with the deposit period offering the highest interest and closest to the target time horizon.
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