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Benefit from a Possible Rise of FD Rates

By Finserv MARKETS - Sep 13,2021
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Benefit from possible rise of FD Interest Rates - Finserv MARKETS

Factors Impacting Fixed Deposit Rates in 2021

If you have been on the fence about investing in fixed deposits (FDs), then now is the time to take the plunge. There is reason to believe that interest rates on FDs will be looking up very soon. In its bimonthly meeting held on August 6, 2021, the RBI (Reserve Bank of India) concluded that the repo rate and reverse repo rate will be maintained at 4% and 3.35% respectively. Repo rate is the rate of interest on loans given by the RBI to commercial banks. Reverse repo rate is the rate of interest offered by the RBI on deposits made by commercial banks to the RBI.

The repo rate and reverse repo rate determine the interest rate offered by commercial banks and NBFCs to their customers. Investors have been watching these rates keenly, as the interest rates have been steadily eroded by successive lockdowns. Despite this, banking and finance executives have indicated an upswing in repo rates and reverse repo rates owing to a few key economic factors. Some of these factors are:

  • Inflation – Inflation has risen in the past couple of years. The RBI’s repo rate is a tool to control inflation. By increasing the repo rate, the RBI curbs the amount of money being flushed into the economy by banks and eventually helps bring down high levels of inflation.
  • Bigger Government Borrowing Program – The government will resort to borrowing capital to continue its spending on economic growth.
  • 10-year G-sec yield at around 6.2% – Due to rising inflation, government securities and bond yields have also shot up. The increase in repo rates will have a moderating effect on rising yields.
  • Rise in number of Individuals vaccinated – As more people get vaccinated, there is an increasing sense of certainty that lockdowns and other restrictions will reduce in the future.

How to benefit from a Rise in FD rates

Even with positive signs that a policy rate increase could be expected, it is short to mid-term fixed deposits that will see an increase in interest rates. To ensure you can make the most of this rise, here are a few things you can do.

  1. Short Term Fixed Deposits

Whenever repo rates start rising, it is short term and medium-term FDs that usually see an immediate bump up. If you are planning to book a new FD right now, opt for a shorter tenure. This will ensure your investment is locked in at a lower interest rate for a shorter period. Once the repo rates rise, you can renew the same FD for a longer tenure.

  1. Floating Rate Fixed Deposits

Floating rates offered by banks and NBFCs are linked to benchmark rates that move with the benchmark rate. The benchmark could be the average of G-Sec rates over a certain period of time, or any other conservative benchmark. For long term fixed deposits, this is a good option in the current climate.

  1. Create a Fixed Deposit Ladder

A fixed deposit ladder is a good strategy for an existing FD that is up for renewal, or for a new one. In this, you split up the principal amount into parts with varying tenures. Each individual deposit will mature every year, and you have the option of renewing the deposit for a longer period at a higher rate of return. This strategy basically ensures that not all your deposits are locked in at a low fixed deposit interest rate.

  1. RBI floating rate bond for non-cumulative deposit

RBI floating rate bond is a great option for senior citizens. This bond is currently giving a return of 7.15%, which is higher than rates offered by Banks. It has a tenure of 7 years and pays interest semi-annually.

Bajaj Finance Fixed Deposits on Finserv MARKETS

Fixed deposits are a secure savings avenue and there are plenty of good products in the market to suit every investors’ needs. To know everything there is to know about fixed deposits – rates, tenures, payout options and other small print details, Finserv MARKETS is a one-stop solution for you. Choose from the best fixed deposits available in the market with the option to compare and evaluate the best investment option for you.

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