Should you wait for FD interest rate to reach 9% or book your FD now? The rate hike momentum seems like it will continue for some more time, and one cannot be called irrational for expecting a double-digit rate in future
Fixed deposit investors are bewildered with the pace at which their fortunes have turned in last 5 months. There seems to be no pause button in the rate hike cycle which started in May 2022 due to which banks have been increasing FD interest rates. In its latest monetary policy meeting held on September 30, 2022, RBI hiked the repo rate again by 0.5%.Prior to this the central bank had already hiked the repo rate by 140 bps from 4% in May to 5.4% in August this year. Taking into account today’s the repo rate has been hiked by a total of 1.9% (50bps+ 140bps). Four consecutive hikes of repo rate have given further momentum to rising FD interest rates. The era of low FD rates is now certainly behind us, and FD investors can expect better days ahead.
A 50 basis points of hike in FD interest rate from 7% to 7.5% means that on each Rs 1 lakh FD for 5 years, you will end up getting Rs 3,517 additional interest payout.
Will FD interest rates touch the 9% mark?
What was one of the lowest interest rate regimes only 5 months back has suddenly transformed into a decent interest rate regime. The rate hike momentum seems like it will continue for some more time, and one cannot be called irrational for expecting a double-digit rate in future. While double digit rate in near future may appear distant, however, we can very well assess the possibility of FD interest rates reaching the 9% mark.
The likelihood of FD rates touching 9% will depend on how long this rate hike cycle will continue. Though the repo rate has gone up substantially by 1.9% within a short period of 5 months, many experts feel that there is still a scope of 50bps hike in coming 3-4 quarters.
This interest rate hike cycle was started by rising inflation due to supply chain issues and the Russia-Ukraine war. While the peak of inflation may be behind us but world over inflation is far from reaching comfortable levels. Retail inflation in US has started coming down but it is still at an alarmingly high level of 8.3% in August.
To curb this inflation, the US Federal Reserve has not only hiked the interest by a whopping 75 bps in September 21, 2022 to 3-3.25% but also indicated that the aggressive rate hikes may continue in future as well. The US Federal Reserve is a trend setter of the interest rate cycle globally so we are likely to face its impact in India as well.
The highest FD rate offered by conservative banks like SBI was having a spread of 1.5% and it was offering a rate 5.5% on 5-year tenure while the repo rate was at 4%. If it maintains the same spread and if the repo rate touches 6.5% in coming months, the bank may raise the FD rate for general citizens to 8%. This means that rate for senior citizens may go up to 8.5% and in case the bank continues with special rate FDs for senior citizens with 80 bps higher rate, then they may get a rate of 8.80%.
Smaller banks will be much ahead in raising their interest rates. Many prominent smaller banks have started offering FD rates of 7% to general citizens and 7.5% or above rate to senior citizens. For instance, the highest rate offered to general citizens by Bandhan Bank and IndusInd Bank is 7% and senior citizens are getting 7.5% or higher return from these banks. With universal banks offering deposit interest rate of round 8-8.5% there is a real possibility of at least small finance banks offering a 9% interest rates on theirs FDs in the coming 3-4 quarters.
Slower transmission of rate hike in FDs
Whenever policy rates start going up it is the lending rates that see quicker transmission while the rate transmission is slower in FD rates. The repo rate was hiked by 1.40%, however, the deposit interest rate hike has been lower. There is usually a lag when the banks start passing on the benefit of a rate hike to the depositors. While some smaller banks have already raised the rates by a higher percentage, bigger banks have been slower in doing so. The reason for delayed transmission of hike in deposit rates is that bigger banks already have sufficient liquidity and hence, competition for deposits is not very high.
However, going forward if the RBI keeps raising rates gradually, banks will be compelled to raise their deposit interest rates as well. Therefore, FD investors should keep this in mind that it may take long after the RBI is done with its series of rate hikes for the depositors to get the entire benefit.
Should you book long term FDs after current hikes?
Though a rate hike is welcome news for depositors, however, it comes with a fair share of dilemmas. Even though the direction of interest rate has reversed, however, nobody is sure where the rates will finally reach and how long it will take for interest rates to peak. If you wait longer to book your FD for a higher rate you will end up losing on current growing rates and if you book long-term FDs after only a few hikes, you may end up at the losing end if the rates keep growing later. We tell you how the interest rate is likely to move and how you can make the best out of the unfolding situation.
Should one wait for rates to cross 9% for booking long term FDs?
If you are looking to book an FD for the long term or a big FD is due for renewal, this may not be the right time to do so. In a growing rate scenario, it is better to book FDs with short tenure so that it can benefit from the hike during the investment period. So, booking an FD with a tenure of 6 months to one year could be a better strategy. Once these FDs mature and you get a better rate at the time of renewal you can book longer term FDs.
( Originally published on Sep 29, 2022 )
This story originally appeared on: Muscle & Fitness - Author:Faqs of Insurances
