The Reserve Bank of India (RBI) has increased repo rates, the rate at which the central bank lends money to commercial banks. Due to this, many commercial banks throughout the nation have raised their lending interest rates and fixed deposit interest rates across tenors.
With this latest hike, the total hike over the previous 10 months has increased by 2.5%. The timing could not have been better for FD investors, who had been battling with one of the lowest FD interest rates in India for the last two decades. They are now hoping that these significant repo rate increases will be passed on to bank FDs.
Investors in FDs as to whether the FD interest in India rates have peaked and whether they should lock in their money in FDs with longer maturity dates.
Few Banks Have Increased Fixed Deposit Rates
Up till April 7, 2023, ICICI Bank is giving fixed deposits with a term of 5 to 10 years at an interest rate of 7.50 percent for senior citizens. For deposits under Rs 2 crores, HDFC Bank has introduced the Senior Citizen Care FD with an 7.75% interest rate for a term of 5-10 years until 31st March, 2023.
Along with the Amrit Kalash Deposit New Fixed Deposit Plan, which offers senior citizens 7.60% interest on fixed deposits between 5 and 10 years, SBI Bank is offering a fixed deposit interest rate of 7.5% for seniors.
The IDBI bank FD rates have also been revised. The additional interest rate on fixed deposits for older residents has increased by up to 0.75% according to IDBI Bank. The deposit minimum is Rs.10,000 and the deposit maximum is Rs.2 crores.
For fixed deposits between 1 and 2 years (with the exception of 444 days and 700 days), senior citizens can earn an interest rate of 7.50%, and for fixed deposits between 2 and 3 years, the interest rate will be 7.25%. Seniors who make fixed deposits lasting 1001 days receive the highest interest rate, 9.50% from Unity Small Finance Bank.
Given that the RBI has increased repo rates by 250 basis points since May 2022, investors should just not keep sizable sums of money idle in savings accounts. You can also try FD laddering that offers various benefits during this time.
Fixed Deposit Laddering
Creating an FD ladder is also a possibility because it enables you to split a sizable investment into numerous portions and book each portion after a time interval. This lets you receive the average return and periodic liquidity during periods of interest rate volatility.
For investors who always keep a portion of their portfolio in FDs, FD laddering is an excellent idea. If one parks their emergency cash in a bank account or FDs, they can adhere to this notion extremely effectively.
But nonetheless, it is crucial to pick the proper tenor and frequency of deposits. Short-term laddering of FDs will enable you to reinvest at maturity at a higher interest rate while also providing you with periodic liquidity. So, it would be advisable to purchase short-term FDs and then reinvest them for longer terms over the following few months.
For example, if you have Rs.20 lakhs, you can open the first FD for Rs.5 lakhs for a period of six months, followed by a second FD for Rs.5 lakhs for a period of nine months, and so on. After your first fixed deposit matures, you can extend the tenor to 2 years. Later on, after your second FD matures, you can continue to extend the tenor for another two years and three months, and so on. As these FDs reach maturity, you lengthen the term to three years and make the time between the two FDs nine months apart.
The objective continues to be to keep the tenor short for now and lengthen it over time as the interest rate rises. Even under FD laddering, a portion of the funds is invested in longer-term deposits. This can be prevented right now by dividing the investment into low or medium-duration FDs. We believe that keeping money out of longer-term debt instruments is crucial.
Financial experts advise investors to utilize liquid assets now for higher returns compared to savings accounts where banks have not raised interest rates. They contend that while liquid funds currently yield 6% as opposed to savings accounts' yields of 50% or less, investors can transfer some funds from savings accounts to liquid funds.
