Fixed deposit (FD) investors have benefited from rising interest rates. Interest Rates The rates have reached their peak in the last 1-2 years and have remained there for quite some time. However, this favorable situation is not expected to continue indefinitely.
Although reserve Bank of India (RBI) has kept the repo rate on hold, it is expected that this could be the last pause before the central bank starts a cycle of interest rate cuts, potentially leading to a gradual reduction in bank interest rates. FD Interest RatesWhile FD investors benefited from a rising interest rate environment, the same investment approach may not deliver the same benefits in a falling interest rate scenario.
“Given resilient economic growth, the RBI has some flexibility to wait till inflation comes below the target of 4% before considering a rate cut,” ET quoted Raghavendra Nath, MD, Ladderup Wealth Management Pvt as saying.
Where are FD interest rates headed?
Though policy rate cuts may kick in soon, it may take some time for banks to reduce their FD rates. Mahendra Kumar Jaju, CIO, Fixed Income, Mirae Asset Investment Managers, explains that Bank deposit Interest rates have risen at a slower pace than lending rates in recent times, and while market rates were rising, banks did not raise deposit rates substantially.
Read this also | Latest FD Rates: Which PSU banks are offering the highest fixed deposit rates in August 2024? Check list
For example, many banks still offer around 3% interest on savings deposits. Even for long-term deposits, the rates do not look attractive compared to market rates. As a result, it seems unlikely that banks will be able to reduce deposit rates significantly in the near future.
However, there may still be an opportunity for a hike in fixed deposit interest rates, as some banks are facing liquidity crunch and may increase FD interest rates to attract depositors. Adhil Shetty, CEO, BankBazaar.com says, “Fixed deposit rates are likely to increase, as some banks have recently announced hikes.”
An important point to note is that although there may not be any major reduction in FD rates in the near future, the overall interest rate reduction cycle has already begun, and interest rates are expected to be reduced multiple times in the next 9-12 months.
If you have surplus funds or FDs that are maturing soon, this could be the ideal time to lock in your funds at the current high interest rates. Nirav Karkera, Head Research, Fisdom, suggests, “This is an opportune time for fixed income investors to lock in rates at higher levels. Given how one balances between status quo and a decline in terms of future rates, fixed rate propositions may be preferred over floaters.”
Long-term FDs are likely to be less affected by the initial interest rate cut, while short to medium-term FDs may see a greater rate cut. This means that you are less likely to get better interest rates when your FD matures in the future.
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Karkera advises investors who have already climbed the ladder Fixed deposit Time horizons may face reinvestment risks in order to optimize liquidity.
To deal with this problem, it may be wise to adjust your FD ladder strategy. “It may now be wise to move away from a ladder to a strategy closer to a barbell, where long-term savings lock in returns at higher rates and short-term FDs are maintained to serve liquidity, not for reinvestment,” advises Karkera.
This approach involves keeping a portion of your funds in short- to medium-term FDs to meet liquidity requirements, while investing a larger portion of your portfolio in long-term FDs, which currently offer higher interest rates.
Although reserve Bank of India (RBI) has kept the repo rate on hold, it is expected that this could be the last pause before the central bank starts a cycle of interest rate cuts, potentially leading to a gradual reduction in bank interest rates. FD Interest RatesWhile FD investors benefited from a rising interest rate environment, the same investment approach may not deliver the same benefits in a falling interest rate scenario.
“Given resilient economic growth, the RBI has some flexibility to wait till inflation comes below the target of 4% before considering a rate cut,” ET quoted Raghavendra Nath, MD, Ladderup Wealth Management Pvt as saying.
Where are FD interest rates headed?
Though policy rate cuts may kick in soon, it may take some time for banks to reduce their FD rates. Mahendra Kumar Jaju, CIO, Fixed Income, Mirae Asset Investment Managers, explains that Bank deposit Interest rates have risen at a slower pace than lending rates in recent times, and while market rates were rising, banks did not raise deposit rates substantially.
Read this also | Latest FD Rates: Which PSU banks are offering the highest fixed deposit rates in August 2024? Check list
For example, many banks still offer around 3% interest on savings deposits. Even for long-term deposits, the rates do not look attractive compared to market rates. As a result, it seems unlikely that banks will be able to reduce deposit rates significantly in the near future.
However, there may still be an opportunity for a hike in fixed deposit interest rates, as some banks are facing liquidity crunch and may increase FD interest rates to attract depositors. Adhil Shetty, CEO, BankBazaar.com says, “Fixed deposit rates are likely to increase, as some banks have recently announced hikes.”
An important point to note is that although there may not be any major reduction in FD rates in the near future, the overall interest rate reduction cycle has already begun, and interest rates are expected to be reduced multiple times in the next 9-12 months.
If you have surplus funds or FDs that are maturing soon, this could be the ideal time to lock in your funds at the current high interest rates. Nirav Karkera, Head Research, Fisdom, suggests, “This is an opportune time for fixed income investors to lock in rates at higher levels. Given how one balances between status quo and a decline in terms of future rates, fixed rate propositions may be preferred over floaters.”
Long-term FDs are likely to be less affected by the initial interest rate cut, while short to medium-term FDs may see a greater rate cut. This means that you are less likely to get better interest rates when your FD matures in the future.
Read this also | Gold price forecast: Is the precious metal still a good investment option after import duty cut?
Karkera advises investors who have already climbed the ladder Fixed deposit Time horizons may face reinvestment risks in order to optimize liquidity.
To deal with this problem, it may be wise to adjust your FD ladder strategy. “It may now be wise to move away from a ladder to a strategy closer to a barbell, where long-term savings lock in returns at higher rates and short-term FDs are maintained to serve liquidity, not for reinvestment,” advises Karkera.
This approach involves keeping a portion of your funds in short- to medium-term FDs to meet liquidity requirements, while investing a larger portion of your portfolio in long-term FDs, which currently offer higher interest rates.