Fixed Deposit Holders Can Cheer Again, As RBI Hikes Interest Rates Once More

The last few monetary policy announcements have largely been helpful for fixed deposit holders who were getting very poor interest rates. Fixed deposit holders, who largely depended on fixed interest for sustenance have something to cheer about as deposit interest rates are likely to move up even further. Following today's hike, the RBI has now taken interest rates or repo rates as they are called from 4% to 6.25%, resulting in a good 225 basis points increase in the repo rates.

This has led to fixed deposit interest rates moving from levels of 5.5% to 7.5%. Today, even government banks like Union Bank and Canara Bank offer interest rates of 7% to 7.5% on fixed deposits. SBI on the other hand has hiked rates from levels of as low as 5% to 6.5%.

In fact, small finance banks offer interest rates of as much as 8 to 8.5%. Following today's RBI policy we might see fixed deposit interest rates increase by another 25 basis points. The quantum of increase would largely depend on credit growth of most of the banks. If demand for credit is high, deposit interest rates may go even higher.

We would advise investors to look to deposits with a maturity of 3 to 5 years, as interest rates over the longer term could fall.

Overall, the hike in interest rates was largely in line with expectations and it widely believed that we may see a long pause from the RBI. In short, this could be a peak for interest rates and invest over the next 3 to 6 months before interest rates start falling all over again.