RBI Policy: With interest rate hike, FD interest rates to follow

As RBI raised its repo rates for third time in a row, this time by 50 basis points, the interest rates on fixed deposits (FDs) are likely to follow suit, which would spell a good news for the conservative investors.

Ever since the Reserve Bank of India (RBI) raised repo rates by 90 basis points in a span of two months (May and June), commercial lenders have been raising interest rates on term deposits, as well as savings accounts, one after the other.

For the unversed, the regulator raised the repo rate, in a surprise move, on May 4 by 40 basis points (bps) to 4.40 per cent. This was followed by a 50-basis point rate hike on June 8. And now, the latest rate hike on August 5 of 50 bps raised the policy rate to 5.4 percent.

Although savings and fixed deposit rates have not been raised by the same quantum, but have followed an upward trajectory.

Most recently, Bank of Baroda raised its fixed deposit and recurring deposit interest rates.

In July itself, Kotak Mahindra and Punjab National Bank have raised their FD rates. HDFC Bank raised its FD rates in June, South Indian Bank raised in April followed by Bajaj Finance Bank.

The rates are still lower than what NBFCs (non-banking financial corporations) offer but investors should keep in mind that with higher return, comes the higher risk.

However, wealth advisors are of the opinion that investors should ideally lock in the FD rates only after the interest rate cycle stabilizes. In the rising rate scenario, they advise investors to opt for short term FDs so that they do not lose out on higher rates that may be introduced after some time.

Renu Maheshwari, investment advisor, cofounder, Finscholarz Wealth Managers says, “Interest rate cycle is on a rise. How high will the rates go will depend on the inflation rate. Locking in for a longer term right now is not a good idea. Short term deposits or mutual funds can be used before locking in for a longer term.”

As of now, most banks offer FD rates around 5.2-5.3 percent for one year and around 5.45 to 5.5 percent for 2-year FDs and around the same rate for long duration FDs.

For example, Bank of Baroda offers 5.3 percent for one year FD and 5.45 percent for FD up to two years. HDFC Bank offers 5.35 percent for one year FD and the same rate for two-year FD.

At the same time, SBI gives 5.3 percent for one year FD and 5.35 percent for two-year FD.