When it comes to finding answers to queries like when interest rates on fixed-term deposits will rise in India the answer could be seen in the recent repo rate hike. Continuing the repo rate hike cycle in 2022, the Reserve Bank of India today, 05 August 2022, again hiked the rates by 0.50 per cent during the monetary policy meeting held. It is worth mentioning that this is the 3rd hike in the repo rate within a span of 100 days.
Rising FD interest rates have gained additional traction as a result of three consecutive repo rate increases by the RBI. There is no doubt that the era of historically low FD rates is over, and FD investors may look forward to brighter times in the future.
For a very long time, FD rates have been relatively low. The last few years have not been great for those that rely on it in terms of returns. But now, things are changing. As RBI hiked repo rate, FD rates are anticipated to rise in 2022 and 2023.
Banks and other NBFCs have already begun gradually raising FD rates after RBI made it clear that repo rates will change. However, since inflation is a major concern for RBI, FD rates are all set to rise more in near future based on the present predicted trajectory of the RBI's policy rates. Here, we provide insight into how the interest rate is likely to change and how to take advantage of the situation as it develops.
Whether FD will reach 7-8% Soon?
Most likely yes but it is not sure whether it will reach 9 per cent. However, if not immediately but soon for all tenures the rate hike is expected to happen as the repo rate is getting a major boost. Although it is difficult to forecast how high these rates will ultimately go, there is a considerable likelihood that they will exceed 7 per cent if the repro rate gains get a major boost.
Does it reach 8 per cent? This won't happen in 2022, however, nobody is really sure how high FD rates may rise in the future. It is hardly impossible that the rate may reach 8 per cent in a few quarters. It might not reach 8 per cent in the near future or in 2023, but it will likely be close to it.
There are no guarantees in the current scenario that we are reaching 8 per cent. Everything is speculation when it comes to some FD tenure rates increasing to 8 per cent in the near future.
If we look at the small finance bank and some FDs by NBFCs we can see that they offer FDs at very higher rates. However, depending on how long this rate hiking cycle lasts, there is a chance that FD rates will reach 8 per cent.
How Should You Approach Fixed Deposits Right Now?
If you have money in fixed deposits or are thinking about doing so, you should handle the situation of shifting interest rates with some caution. To benefit from the rising-rate scenario, for the time being, stick to shorter-term FDs with maturities no longer than 6 to 12 months. Interest rates won't increase all at once, it is a slow process. There is little benefit to locking your FDs for a long period of time in the current context when FD rates will gradually increase.
After recent hikes, should you make long-term investments?
Although a rate increase is a good news for depositors, it also poses a number of challenges. Nobody knows where the rates will ultimately go or when they will peak, despite the fact that the direction of interest rates has reversed. If you wait longer to book your FD for a higher rate, you will lose out on the already increasing rates, and if you book long-term FDs after just a few hikes, you may lose out if the rates continue to rise in the future. In this case, going for the FD laddering strategy could work for you.
FD Laddering Strategy
If you don't want to keep waiting for FD hike benefits, going for the FD laddering is another option you can adopt. But what is FD's laddering strategy?
Suppose if you have Rs 10 lakhs in with you to invest fixed deposits. Now, divide it into 10 equal payments of Rs 1 lakh each. Make fixed-term investments with varying terms in a growing period. The theory behind this strategy is that when interest rates rise in the near future, you will have a significant amount of money mature and ready for renewal at higher rates.
The above strategy would work well for you while parking money in bank deposits if you utilise fixed deposits to house your emergency fund or to save money away for short-term expenses.
Do remember this, FD interest income is taxed at the rates applicable to your tax bracket and may not still outperform inflation. However, Debt funds offer a real possibility for higher post-tax returns if you are even a somewhat aggressive investor.
Debt fund returns are not fixed nor guaranteed like FD (up to 5 lakh), but if you hold onto your investments for a while, their indexation benefits can beat FDs in terms of post-tax returns. Therefore, debt funds can be an excellent substitute for fixed deposits in India if you understand how they operate. However, going for Debt funds requires an understanding of how it works for safe investing.