The Reserve Bank of India (RBI) raised its key interest rate for six consecutive times in the past one year before pressing the pause button on April 6, thus kicking off the commencement of a rising interest rate cycle.
After the banking regulator raised repo rates in six consecutive monetary policy committee (MPC) meets in 2022, lending and deposit rates rose across tenures, although not by the same quantum.
Consequently, there are now a number of banks that offer anywhere between 7 to 8 percent per annum for term deposits of different durations.
Investment advisors, therefore, suggest investors that this is the right time to block their money in term deposits since interest rates have already hit a high.
Preeti Zende, a Sebi-registered investment advisor (RIA) and founder of Apna Dhan Financial Services, says: “Those who are waiting to make FD for their short-term goals now can start doing so. It seems that interest rate peak is almost there. There can be only one small rate hike or now the rates can be stagnant. So, if you want to go for FD, you can do so for multiple time frame and some amount can be kept aside for the next RBI announcement.”
Akshar Shah, founder of Fixed, an investment tech platform, asserts that central banks across the globe slowly hike rates or pause them, it’s becoming clear that interest rates have peaked. “Investors can take advantage of high fixed deposit rates that are almost at 5-year highs by using a laddering strategy.”
“By locking in their deposits over a staggered period, investors can ensure a steady stream of returns and mitigate the impact of any future rate changes. It’s a prudent approach to investing in uncertain times. With interest rates expected to remain stable for the near future, investors can secure a guaranteed return on their investment by opting for a fixed deposit, while also minimizing their exposure to market volatility,” he says.
Long term for higher rates
Some experts believe that investors should opt for term deposits when they have an investment horizon of longer than three years.
“One can definitely consider allocating part of debt portfolio towards Fixed Deposits especially if your investment horizon is more than 3 years,” says Gaurav Rastogi, founder and CEO, Kuvera.in.
About investing for shorter duration, he says that investors should consider opportunistically setting up fixed deposits.
“While short term debt mutual funds have the advantage of liquidity without any withdrawal costs except for exit load in some cases, Fixed Deposits issuers do impose a premature withdrawal charge for withdrawing earlier. So, for short term needs consider setting up multiple Fixed Deposits for different tenors along with short term debt mutual funds so that this cost is minimized should you have an urgent need to withdraw.”
However, it is important to note that investors should not try to predict the interest rate cycle since it is as risky as forecasting market movements. Therefore, they should act on the basis of current circumstances.
“Predicting changes in interest rate cycles can be as challenging as forecasting market movements,” says Mr Rastogi.