The Reserve Bank of India (RBI) has raised repo rates in past three monetary policy committee (MPC) meetings. Firstly, it raised the interest rate on May 4 in a surprise move by 40 basis points (bps) to 4.40 per cent.
This was followed by a 50-basis point rate hike on June 8. And the latest rate hike happened on August 5 when the banking regulator raised the rates by 50 bps to 5.4 percent.
Each time the banking regulator raised FD rates; banks were prompt in raising interest rates on fixed deposits as well as on lending rates.
We spoke to a number of experts to find out what they think about the current time and whether investors can now invest in the term deposits — an extremely popular savings instrument among conservative investors in India.
It is important to mention here that in the beginning of this rate hike cycle in the first quarter of this fiscal, most experts dissuaded investors from locking their savings in deposits. This was recorded in an article here. But it was then, and now the circumstances have undergone a change.
Now, there is a popular opinion that says that one can invest in floating rate FDs, while the alternative view is that it may be a good idea to park funds in the short-term FDs and leave room for long term FDs at a later stage after the rates have risen one more time to 6 percent by the year-end, as analysts expect.
What experts say?
Those who intend to invest in a fixed deposit must take note of two things. First is to invest in a term deposit now if they want to now and the second is to opt for a short tenor deposit to minimise the risk arising out of future rate hikes.
S. Sridharan, founder and principal officer, Wealth Ladder Direct, said, “RBI has raised the repo rates three times in past six months. And now the inflation is close to RBI's target and further rate hikes may not be on the cards. So, conservative investors can park some of their debt allocation to fixed deposits or else, they can wait for two months until the interest rates are hiked again. Until then, they can park in short-term FDs such as for 30-40 days so that they can invest in a new FD after rates are raised.”
At the same time, some believe that one can carefully choose the FDs which offer floating rates such as the one offered by Yes Bank.
“Investors can consider Yes Bank's floating rate FD to benefit from any future rate hikes. Other FDs haven't seen a commensurate increase in interest rates compared to market interest rates. We have, however, seen yields on liquid funds and ultra-short-term funds go up, so investors can use these type of debt funds to park short term liquidity,” said Ravi Saraogi, co-founder of Samasthiti Advisors.
However, there are experts who believe that one should not get too hung up on term deposits since they should ideally be compared with debt mutual funds and bonds based on their returns before an investing decision is made.
“Among fixed income investment options, Bank fixed deposits remain the dominant option if you go by the savings pattern. The increase in interest rates in the market has transmitted well to loans and market linked fixed income investment options (i.e., bonds and floating rate deposits), though the same in process for most Bank Deposits and Small Savings. When it comes to investing in FDs you should watch out for which bank’s fixed deposit you are buying, typically, stronger the bank and its parent, the stronger their balance sheet, the safer your deposits are,” said Abhishek Dev Co-Founder and CEO Epsilon Money
“It is difficult to predict the future and to know what the RBI’s view will be when it comes to Repo rates in medium to long-term. Hence if you have savings and want to invest in an FD there is no better time than the present. That said, before you do invest into an FD, do not forget to consider and compare with various Bonds (including Government Bonds) and Debt Mutual Funds which could be comparable and attractive. Food for thought!” he added.