Fixed deposit (FD) investors have benefited from rising interest rates over the past 1-2 years, with rates reaching their peak and remaining there for a considerable time. However, this favorable situation is not expected to continue indefinitely.
Although the Reserve Bank of India (RBI) has maintained the repo rate, it is anticipated that this may be the final pause before the central bank initiates a cycle of interest rate reductions, potentially leading to a gradual decrease in bank FD interest rates.While FD investors profited from the rising interest rate environment, the same investment approach may not yield equal benefits in a falling interest rate scenario.
“Given the resilient economic growth, the RBI has some flexibility to wait until inflation sustainably falls below the 4% target before considering any rate cuts,” ET quoted Raghvendra Nath, MD, Ladderup Wealth Management Pvt. Ltd as saying.
Where are FD interest rates headed?
Although policy rate reductions may commence soon, it may take some time for banks to lower their FD rates. Mahendra Kumar Jajoo, CIO, Fixed Income, Mirae Asset Investment Managers explains that bank deposits have grown at a slower pace compared to credit in recent times, and banks did not sufficiently increase deposit rates when market rates were rising.
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For instance, many banks still offer around 3% interest on savings deposits. Even for longer-term deposits, rates appear unattractive compared to market rates. Consequently, it seems improbable that banks will be able to significantly lower deposit rates in the near future.
However, there may still be an opportunity for fixed deposit interest rates to increase, as some banks facing tighter liquidity conditions may raise FD interest rates to attract depositors. “Fixed deposit rates are likely to increase, as some banks have already announced hikes recently,” says Adhil Shetty, CEO of Bankbazaar.com.
The important thing to note is that while there may not be a substantial decrease in FD rates in the immediate future, the overall interest rate reduction cycle has commenced, and multiple rate cuts are expected in the coming 9-12 months.
If you have surplus funds or FDs maturing soon, now may be the ideal time to lock in your funds at the current high interest rates. “This is an opportune moment for fixed income investors to lock-in rates at elevated levels. Considering how the case for future rates is balanced between status quo and declines, fixed rate propositions may be favoured over floaters,” suggests Nirav Karkera, Head Research, Fisdom..
Long-term FDs are likely to experience a smaller impact from initial rate cuts, while short to medium-term FDs may face a more significant reduction. This implies that the likelihood of securing better interest rates when your FD matures in the future is less probable.
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Karkera advises that investors who have already laddered fixed deposits across time frames to optimize liquidity may be exposed to reinvestment risks.
To address this, it may be wise to adjust your FD laddering strategy. “It may now make sense to move away from a ladder and move to a strategy closer to a barbell where longer term savings lock yields at higher rates and shorter tenure FDs are maintained to service liquidity and not reinvestment as much,” advises Karkera.
This approach involves keeping a portion of your funds in short to medium-term FDs to meet liquidity needs while investing a larger part of your portfolio in long-term FDs, which currently offer higher interest rates.