Bank FD rates soar: Right time for investors to secure peak returns

Small finance banks' FDs yield more than larger banks' offerings, but invest in them sparingly. Investors need to lock into current peak rates before they begin to decline

Several banks like the State Bank of India, Bank of Baroda, and Kotak Mahindra Bank, among other banks have raised the interest rates on their fixed deposits (FDs) in recent weeks. Investors need to lock in at current peak rates before they begin to decline. 

Managing assets and liabilities

The increase in banks’ deposit rates has lagged behind the rise in the repo rate. “The increase in FD rates has been slower and staggered, offering scope for a hike,” says Adhil Shetty, chief executive officer (CEO), BankBazaar.com.

With the Reserve Bank of India (RBI) hiking the provisioning requirement on unsecured loans, banks need additional liquidity. “They are trying to make their deposit rates attractive to be able to garner more deposits,” says Shetty. Banking system liquidity deficit is currently high. “This high deficit has led to an increase in short-term market rates, including bank certificates of deposit (CDs) rates. Hence, banks have increased the rates on their shorter-tenure FDs to attract fresh deposits and manage assets and liabilities,” says Gaurav Aggarwal, chief product officer-credit products, Paisabazaar.com. 

FD rates have peaked

FD rates have largely peaked. “Hereafter, specific banks may undertake small hikes for specific tenures. Once the repo rate starts declining, FD rates will also fall, albeit more gradually,” says Shetty. 

Lock in at best rates 

Most banks offer their best rates in the one- to two-year tenure and a few in the two- to three-year tenure. “Select the tenure that works for you based on your liquidity requirements,” says Shetty.

Longer-tenure FDs generally give higher returns. Nonetheless, going for a tenure higher than two to three years is not advisable. “While FDs of up to 10 years are available, you should avoid investing in them. If you are going to invest for such a long period, you may as well invest in an equity mutual fund (MF) where you could earn almost twice the return,” says Shetty. 

Compare the interest rates offered by your bank with the returns offered by a few small finance banks (SFBs) and private-sector banks on their savings accounts. “Many of these banks offer interest rates of 7 per cent or more on their savings account, depending on the balance amount. Such high-yield savings accounts offer higher liquidity and flexibility than short-term bank FDs,” says Aggarwal.

Consider these alternatives

SFBs: Currently, many SFBs (and a few private-sector banks) are offering FD rates of 8 per cent and above. “As SFBs have also been classified as scheduled banks by the RBI, each depositor is covered under the deposit insurance program, for cumulative deposits (including  fixed and recurring deposits, and current and savings account) of up to Rs 5 lakh,” says Aggarwal. Investors should, however, avoid high exposure to FDs of SFBs. “While no SFB has failed until now, they are still relatively young entities. You should anyway not have to worry much about the safety of your money lying in FDs, so invest only a limited portion of your total FD corpus with SFBs,” says Arnav Pandya, founder, Moneyeduschool. 

 Corporate FDs: Corporate FDs can offer higher returns than bank FDs. “Refer to the long-term credit rating of the non-banking financial company (NBFC) whose FD you plan to invest in. A long-term credit rating of AA and above indicates a strong level of safety,” says Vijay Kuppa, CEO, InCred Money. He cautions that corporate FDs are not covered by the Deposit Insurance and Credit Guarantee Corporation’s (DICGC) insurance. 

Pandya warns against locking into corporate FDs of very long tenure as the risk of the company’s financials deteriorating also increases with time. 

Corporate bonds: Kuppa suggests retail investors stick to investment-grade bonds listed on the exchanges and secured by collateral. 

Debt MFs: Debt MFs offer diversification. “Debt MFs can offer capital gains when interest rates decline. Their main downside is that they do not offer predictable returns. This problem can be solved by investing in target maturity funds that offer a predictable return if held till maturity,” says Kuppa. Debt MFs also allow investors to defer their tax liability since tax is only paid at the time of exit.