RBI Keeps Repo Rate Unchanged: What It Means For Fixed Deposit Investors?

In today's policy meeting, the Reserve Bank of India held the repo rates unchanged. The rates have remained unchanged at 4%. In a statement released today, RBI Governor Shaktikanta Das stated that the Reserve Bank of India maintained the repo rate at 4% and maintains an accommodating posture, while the reverse repo rate stays at 3.35 percent. This is excellent news for fixed deposit (FD) holders, as banks are unlikely to reduce FD interest rates further.

However, fixed returns are still negative since investors are not receiving real returns as a result of rising inflation. Fixed deposit investors might take advantage of this by looking for banks or non-bank financial companies (NBFCs) that provide better yields. Small finance banks are now paying higher interest rates on both short and long-term fixed deposits than public and private sector banks. As a consequence, investing in small finance bank fixed deposit schemes might be lucrative because your deposits are insured by the DICGC up to Rs 5 lakhs.

Investors by investing in corporate fixed deposits, on the other hand, might earn higher interest rates than those offered by public and private sector banks. NBCFs are well-known for paying higher interest rates on fixed deposits than SBI, HDFC, ICICI, or Axis. Muthoot Capital Ltd, Shriram City Union Finance, and Shriram Transport Finance, for example, are now delivering significant returns. CRISIL has rated Muthoot Capital Ltd as FA+/Stable, and it is offering an interest rate of 6.25 percent to 7.25 percent for a term of 1 to 5 years. Similarly, Shriram City Union Finance and Shriram Transport Finance are offering an interest rate of 6.31% to 7.48% on the tenure of 1 to 5 years but Shriram City Union Finance has been rated MAA+/ with Stable Outlook" rating by ICRA and Shriram Transport Finance has been rated FAAA/Stable by CRISIL, "MAA+/with Stable Outlook" by ICRA
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We have highlighted ratings issued by several agencies just to make you aware that while investing in corporate FDs, you should always invest in firms rated AAA or AA+ by rating organisations. In the case of corporate fixed deposits, there is no guarantee of repayment as they are subject to default or credit risks. And even they are not insured by DICGC insurance cover. But the best part is that the returns on Corporate FD do not depend on the fluctuation in the interest rate market compared to bank FDs. What you can do is you can establish corporate FDs only for the short term or you can follow a laddering strategy using which you can park your fixed deposits in multiple tenures so that you can lower the risk involved.

However, investors concerned with public or private sector banks can begin with fixed deposits, but only for short tenure owing to interest rate risk. What does it imply that when the interest rate cycle picks up, banks often raise interest rates on short-term deposits, such as SBI, which raised its interest rates by 10 basis points, or 0.10 percent, on deposits maturing in one year to less than two years in January of 2022. Long-term investors should avoid locking their deposits for the long term because if banks raise their interest rates in the near term, you may wish to withdraw your deposits, which will result in a penalty being deducted from your account.

You can use the FD laddering approach to spread your deposits across various tenors. In order to maximise your returns, long-term investors can make fixed deposits in various tenors which would help in diversifying your deposits and even ensuring the safety of your investments. This will assist you in taking advantage of rising interest rates and also get a chance to avoid hasty withdrawals to meet liquidity demands.