Savers will now be able to get returns in line with the central bank’s policy rate changes at all times. As the repo rate moves up, FD investors will also get higher returns equal to the hike done by RBI. Amol Joshi, Founder, PlanRupee Investment Services commented, “In the Floating Rate FDThe movement of rates will be transparent as the rates are linked to the repo rate. “Those who save on this front always get the raw deal. Over the years, whenever the RBI has increased the policy rate, banks have increased lending rates for borrowers but have not offered an increase in FD rates. Pankaj Bansal, Chief Business Officer, BankBazaar.com said, “Bank FD rates are usually ambiguously set and are not always in line with the policy rates of RBI. With its pegged repo rate, this new offering brings the much needed transparency. ,
Prashant Kumar, MD & CEO, Yes Bank says, “One of the main advantages of this product is that the interest rate revision will happen automatically and will not require any manual intervention by the bank or the customers.” To ensure this, many banks are offering floating rate term deposits to the customers. However, these are mostly pegged to the 90-day bank T-bill rate, which is not a very transparent peg. T-bill rates for banks can vary and depend on several factors. Plus, the reset happens every three months. Meanwhile, repo-linked floating rate FDs give clarity on the exact prevailing rate and the reset will happen on the first day of every month. This will ensure that there is no lag in the interest rate reset.
So should you invest? Floating rate FDs work well when interest rates are expected to rise. This is expected to continue over the next few months. However, these do not work in favor of investors when interest rates fall. For example, if you book a floating rate FD with a mark-up of 1% over the prevailing repo rate of 4.9%, you will earn a return of 5.9%. But if the repo rate falls to 4.5 per cent after six months, the rate on your floating rate FD will be revised to 5.5%.
There are other points to consider. Yes Bank Floating FD offers only reinvestment option with payout at maturity. So it is not for the regular income seekers. For liquidity, overdraft facility is available on FDs up to 90% of the principal value. There is an option for premature withdrawal but only after deducting the applicable penalty. “One disadvantage may be that it is offered only for a tenure of 1-3 years. Anyone who wants to invest for a tenure of less than or more than 3 years will not be able to avail this facility,” says Joshi. The minimum deposit amount for a floating rate FD is Rs 10,000, and the maximum is Rs 5 crore. An additional 0.5% interest rate will be offered to senior citizens.