Right time to plan a bank FD or RD investment

Recent change in the interest rates

The loan rate has been curtailed with an outlook to stimulate the growth in financial system and provides a lifeline to the much troubled real estate sectors. Furthermore, there was clear demand from the Indian Finance Minister to lessen interest rates after a cut in SLR by the RBI few months back due to which banks achieved good liquidity position. The FD rates have been decreased to secure the margin spread of the banks. The curtailed home loan rate would trim the bank’s net margin, but a parallel decrease in fixed deposit rate can contain the impact.

Revised interest rates on home loans and Fixed deposits

HOME LOAN RATES CHANGES
BANKS	Decline	Revised Rates
Bank of Baroda	0.25%	10.5%
IDBI Bank	0.25%	10.5 to 11%
SBI	0.05%	9.95%
PNB	0.25%	10.5 to 10.75%
Indian Bank	Up to 0.5%	10.5 to 11%

 

FIXED DEPOSIT RATES After Change  (For  >1 yr tenure and  amount < 1Cr)
BANKS	Revised Rates
SBI	8.5 to 8.75%
Oriental Bank Of Commerce	9%

The Macroeconomic Reason for Interest Rate Cut

Defying high inflation, the GDP growth has come down to nearby 5.2 to 5.4% mark. There was a concern in the economy some time back that GDP growth could fall below the psychological 5% limit. To subdue such scenario, the incentive of rate easement has been induced in the economy. There’s anticipation that such action would bring the economic growth back into the right track.

Rate Cut and the Common Man

The common man would suffer severely assuming rate reduction in banks fixed deposit rate. The concrete benefit that a person gets while making a fixed deposit is the real rate of interest that it gets. With lowered FD rate now the inflation could easily beat the rate of savings.
 
Let’s understand this with the help of an example,
Fixed deposit rate - (minus) Rate of Inflation= Real Rate of Interest, so:

Situation 1:
If, FD rate > Inflation --- then it implies saving in long term

Situation 2:
IF, FD rate<= Inflation ---then it implies erosion of fund or less savings in long term.

In reduced FD rate situation, a common man will divert the long-term savings to another asset class such as gold, which are highly liquid and has a good long term return record. The govt. is doing its best to keep the common man away from Gold too, by increasing the import duties.

The reduction in home loan rate would help the common man to pay EMI with ease. Bad monsoon over a weak global financial situation had slowed the tempo of economy, but a lessened home loan interest rate is anticipated to bring in some cheers in the face of common man.

Why to invest in FD and RD at this point?

The SBI and some other public sector banks have started a trend of lowering the interest rate in FD and very soon private banks would initiate the same move. For an investor, this is a very good time to start an RD or FD savings as the rates offered by some banks are still on the higher side. Since home loans and car loans have also observed interest rate correction in past few months, it is getting significant for the banks to maintain the margin spread and avoid losses.

All the vital factors are indicating an interest rate reduction in FD in the coming days. FD is supposed to be one of the most secured and reliable saving instruments amongst other investment options. In current scenario, it is judicious for an investor to lock the fund in FD with an assured return of around 9-9.5% per annum. Obviously, there is always a flexibility to move out of bank’s FD/RD if the situation changes abruptly. It is a very good time to take advantage of FD investment before rates are reduced further.

Source: InvestmentYogi.com is one of the leading  personal finance portals in India.