FD hiked by 50 basis points Rate of interest From 6.5% to 7% means that for every 1 lakh FD for 5 years, you will get an additional interest payment of Rs 3,436.
Will FD interest rates touch the 8% level?
8% interest on FD is the psychological benchmark as any return above this is considered a good return by a good number of FD investors. So, what are the chances of deposit rates reaching the 8% mark?
The probability of FD rates reaching 8% will depend on how long this rate hike cycle continues. While the repo rate has risen significantly by 1.4% within a short span of 93 days and RBI has indicated a withdrawal of the accommodative stance, many experts are of the view that the coming 3-4 quarters are still There is scope for 50-100 bps increase.
“While inflation is showing some early signs of moderation, we believe external sector risks are very high and on margins, to offset increasing pressure on INR, RBI should go ahead with rate hikes, even if May the overall terminal rate not be much higher. We expect a 85 bps hike in the repo rate to 5.75% by the end of 2022,” says Upasana Bhardwaj, Chief Economist.
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A credible indication for long-term interest rates is the 10-year G-Sec yield, which recently recorded a peak of 7.475% on July 11, 2022. Rising yields point to higher rates going forward. “We are not yet finished with the rate hiking cycle and we may be ready for a continued northward journey in rates. The return of the accommodative stance has been maintained. We refer to this as the “no dovish” policy. Let’s see, which is the opposite of the expected trend for the markets. Bond Markets Lakshmi Iyer, Chief Investment Officer (Debt) and Head Products, Kotak Mahindra Asset Management Company, will now focus on incremental G-Sec supply and from global bond yields. Will take a hint
The depreciation of the rupee against the USD has also been a challenge which could be aided by higher interest rates. “The rate hike issue before the RBI is a bit more complicated than currency considerations, where I believe India will have to be directly in line with global central banks, while the quantum of action will be favorable to our own economy. Inflation drivers have eased, keeping the terminal repo rate in the range of 6%-6.25% for now, and after a prolonged pause,” says Akhil Mittal, Senior Fund Manager, Tata Mutual Fund.
Highest FD rate such as offered by conservative banks
There was a spread of 1.5% and it was offering a rate of 5.5% on a tenure of 5 years while the repo rate was 4%. If it maintains the same spread and if the repo rate touches 6.25% in the coming months, the bank may increase the FD rate for common citizens to 7.75%. This means that the rate for senior citizens may go up to 8.25% and if the bank continues the special rate FD for senior citizens with 80 bps higher rate, they may get the rate of 8.55%.
Small banks will be ahead in raising interest rates. Several major small banks have started offering FD rates of 6.5 per cent to general citizens and 7% or more to senior citizens. For example, the highest rate offered to an ordinary citizen
, and 6.5% and senior citizens getting 7% or more returns from these banks. The highest rate is 6.65% while Deutsche Bank is offering 7% as the highest rate for general citizens.
The current situation is extraordinary in many ways due to liquidity infusion related to the COVID-19 pandemic by several countries and hyperinflation led by the Russo-Ukraine War. Hence, FD interest rates are likely to touch the 8% level in the near future. Since the pace of interest rate growth seems to be strong, it is not too far-fetched to expect the interest rate to reach close to 8% within 1-2 years.
Slow transmission of rate hikes in FDs
Whenever policy rates start rising, lending rates tend to move faster while FD rates tend to have slower rate transmissions. The repo rate was hiked by 0.90%, although the hike in the deposit interest rate has been modest. There is usually a lag when banks start passing rate hike benefits to depositors. While some smaller banks have already raised rates, larger banks will be slow to do so. cause of delayed transmission of increase in deposit rate It is that the big banks already have sufficient liquidity and hence, the competition for deposits is not very high.
However, going forward, if the RBI continues to raise rates gradually, banks will be forced to increase their deposit interest rates as well. Therefore, FD investors should keep in mind that it may take a long time after a series of rate hikes by RBI to pass on the full benefits to the depositors.
Should you book a long term FD after the current hike?
Though a hike in interest rates is welcome news for depositors, it comes with a lot of dilemmas. Even if interest rates have reversed direction, however, no one is sure where rates will end up and how long it will take for interest rates to peak. If you wait longer to book your FD for a higher rate, you will lose out on the current rising rates and if you book a longer term FD after only a few hikes, the rates will continue to rise later. You may suffer loss while staying. We tell you how the interest rate is likely to move and how you can make the best of the situation that unfolds.
Should I wait for the rates to cross 8% to book a long term FD?
So, if you are looking to book an FD for a longer tenure or have a larger FD to be renewed, this may not be the right time to do so. In a rising rate scenario, it is better to book an FD with a shorter tenure so as to benefit from the growth during the investment tenure. Hence, booking an FD with a tenure of 6 months to one year can be a better strategy. Once these FDs mature and you get a better rate at the time of renewal, you can book for a longer term FD.