Setting a new benchmark of offering high returns on its fixed deposits (FDs), Yes Bank recently announced to offer floating rate fixed deposits for its customers. Calling them ‘intelligent fixed deposits’, the private lender promises to offer dynamic returns by linking the returns to the RBI's repo rate.
The bank gives assurance of a fixed deposit that will enable customers to let their returns grow. In a statement, Yes Bank announced, “Our floating rate fixed deposit automatically adjusts interest rates according to the repo rate. This means that your rate of return changes whenever the repo rate changes.”
For example, as of now, repo rate stands at 4.9 percent over which Yes Bank gives a fixed mark-up of 1.1 percent for short tenor deposits, thus taking the rate of interest on FDs to 6 percent per annum. The short tenor deposits range between 12 to 18 months.
For long tenor deposits i.e., between 18 to 36 months, the mark up of 1.6 percent is slightly higher, thus taking the rate to 6.5 percent.
As a rule, the bank stated that the FD rate will be reset on the first day of the subsequent month.
To sum up, the bank highlights that there are three main characteristics of opening an FD account with Yes Bank:
A. Every time repo rate changes, FD rate will change too.
B. There will be no intervention of the bank with regards to FD rate, and it will change automatically with the repo rate
C. There will be no restrictions in the number of times FD rate can change in one financial year.
For those who are unaware, repo rate is a rate at which Reserve Bank lends money to commercial banks on short term basis. During every bi-monthly monetary policy committee meeting, banking regulator reviews the rate and sometimes changes it to control liquidity in the market.
Win-win situation
Wealth experts also welcome the bank’s innovative step of offering dynamic returns. “The introduction of floating rate fixed deposit by Yes Bank is a welcome step as it provides a win-win situation for both the investor as well as for the bank. By linking the interest rates with the prevailing repo rate, the bank is passing the benefit of any further increase in repo rate by the Reserve Bank of India. This feature is not available in the traditional fixed deposit where the interest rates are fixed at the time of investment itself,” said Mukesh Vijayvergia, Founder of Nishkaera Financial Advisory.
He adds, “Investors would prefer to invest in floating fixed deposits than in traditional fixed deposits when there is a possibility of a further hike in interest rates by RBI. Banks also get benefitted from the increase in liquidity as many equity investors are likely to shift a part of their investment in such products. This is a good investment option for investors for at least for 1-2 years period.”
Flip side too
Dev Ashish, Founder, Stable Investor also says that these deposits are likely to work well because RBI has already made its stand clear that rate hikes are a certainty in the short term.
“So as of now, these deposits are expected to work well as the depositors gain from rising returns from their dynamic FDs. One can benefit from interest rate hikes without having to break existing deposits,” says Dev Ashish.
However, there is a flip side to this as well. “This works well in a rising-rate environment, it becomes highly unrewarding in a falling-rate environment,” adds Ashish.
“This should not be the only factor when choosing a bank to park your FDs in. If the amount in FDs is higher than DICGC’s cover of ₹5 lakh, then one should also assess the financial health and stability of the bank itself instead of going after the highest rate. For large deposits where safety is paramount, one can look at spreading deposits across systemically important banks. One can even look at laddering of FDs to benefit from the rising interest rates in future,” he adds.
Meanwhile, Sarthak Garg, Founder - Newsnest®, Angel Investor says that the rate of interest on this fixed deposit (FD) will be linked to the prevailing repo rate, allowing the customers of the bank to enjoy dynamic returns on their fixed deposits. Bank Customer can earn higher return on their investment and can compete with higher inflation which otherwise erode their wealth. So to get the maximum advantage of this incentive one should avoid investing in long term FD.
“By opting for shorter term deposits, say one year or less, in the current scenario, you can avoid locking your money for the long term and take advantage of the interest rate hike as and when it happens. To boost their return on investment one can opt FD ladder strategy An FD ladder is created by breaking one big FD into smaller FDs of different tenures to extract the most out of investment,” he adds.