Earlier the central bank had already hiked the repo rate by 140 bps from 4% in May to 5.4% in August this year. Keeping in mind today’s repo rate, a total increase of 1.9% (50bps + 140bps) has been done. Four consecutive hikes in the repo rate have given further impetus to the hike in FD interest rates. The era of low FD rates is definitely behind us, and FD investors can look forward to better days ahead.
Raj Khosla, Founder and MD, MyMoneyMantra says, “Depositors may finally be happy as the interest rate on Fixed Deposits (FDs), Recurring Deposits (RDs) will fetch a decent return as compared to many market-tradable securities. com.
increase of 50 basis points in FD interest rate 7% to 7.5% means that on every 1 lakh FD for 5 years, you will get an additional interest payment of Rs 3,517 on maturity.
Will FD interest rates touch the 9% level?
what was one of the least Rate of interest The regime of just 5 months back has suddenly turned into a good interest rate regime. It seems that the pace of rate hike will continue for some more time, and one cannot be called irrational to expect double digit rate in future. Although double-digit rates may look distant in the near future, however, we can very well assess the chances of FD interest rates reaching the 9% mark.
“Despite a cumulative 190 bps hike since May this year, it is encouraging to see the central bank projecting a growth rate of 7% for FY23. Going forward, we will look at some more rates by RBI before a prolonged pause on rates. We hope to grow in the market,” says Nish Bhatt, Founder and CEO, Millwood Cane International – an investment consulting firm.
“Amidst a challenging global monetary policy backdrop, RBI remains with a growth of 50 bps for the third time in a row and keeps a close watch on domestic inflation. Return of Habitat” said Vikas Garg, Head of Fixed Income, Invesco Mutual Fund. There is indication of more rate hikes to go ahead with.
FD rates likely to touch 9% will depend on how long this rate hike cycle continues. Though the repo rate has increased significantly by 1.9% within a short span of 5 months, many experts believe that there is still room for a 25-60bps hike in the coming 2-3 quarters.
“Market was positioned for peak policy rate near 6%, today’s 50bp increase will raise expectations that peak policy rate is higher than before. We see peak policy rate of 6.5% now then +60bp from here. But, We are cognizant that if the government does not use tax/trade policies to reduce import demand, the burden on RBI will increase,” says Prithviraj Srinivas, Chief Economist, Axis Capital.
“The consensus estimates are that the terminal repo rate is closer to 6.90 per cent, which leaves us with the possibility of a hike of 100 basis points in the next two sittings, which may or may not come to fruition. India and across the world “It is all about the “fight against inflation”, and in the present times, India is doing much better,” says Tejas Khode, CEO and co-founder of FYERS.
This interest rate hike cycle was triggered by supply chain issues and rising inflation caused by the Russo-Ukraine War. While the peak of inflation may be behind us, worldwide inflation is far from reaching comfortable levels. Retail inflation in the US has begun to ease but is at an alarmingly high of 8.3% in August.
To curb this inflation, the US Federal Reserve has not only hiked interest rates by a whopping 75 bps to 3-3.25% on September 21, 2022, but has also indicated aggressive rate hikes. The growth may continue in future also. The US Federal Reserve is a trend setter of interest rate cycles globally, so we are likely to face its impact in India as well.
“Given the aggressive rate hike cycle by the US Fed, lower spread between Indian and US bond yields, and a stronger USD, we expect the RBI to take another 25-35 bps closer to the repo rate in December. rate will increase. 6.25%. Thereafter, we expect a pause, and the future trajectory will depend on the incremental macro data,” says Arun Kumar, Head of Research, FundsIndia.
“Unlike AEs (advanced economies), RBI refrained from providing any further guidance for its monetary policy as it felt it could be risky for an emerging market country like India. We are of the view that RBI will deeply and extend its rate hike cycle as a result of the global dynamics of policy rates.We believe that the RBI will be open to pushing the repo rate to the level of 6.50% by February 2023, which means that Two more hikes – 35 bps in December and 25 bps in February,” says Indranil Pan – Chief Economist, Yes Bank.
Highest FD rate such as offered by conservative banks State Bank Of India 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 reaches 6.5% in the coming months, the bank may increase the FD rate for common citizens to 8%. This means that the rate for senior citizens may go up to 8.5% and if the bank continues the special rate FD for senior citizens with 80 bps higher rate, they may get the rate of 8.80%.
Smaller banks will be ahead in raising their interest rates. Many major small banks have started offering FD rates of 7% to general citizens and 7.5% or more to senior citizens. For example, the highest rate offered to ordinary citizens Bandhan Bank And indusind bank 7% and senior citizens getting 7.5% or more returns from these banks. With Universal Bank offering deposit interest rate of around 8-8.5%, there is a real possibility of small finance banks offering 9% interest rates on their FDs at least in the coming 3-4 quarters.
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 1.40%, however, 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 by higher percentages, larger banks have been slow to do so. The reason for the delayed transmission of increase in deposit rates is that large banks already have sufficient liquidity and hence, the competition for deposits is not very high.
However, going forward, if RBI continues to raise rates gradually, banks will be forced to increase their deposit interest rates as well. Hence, 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 the direction of interest rates has reversed, 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 incur losses 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 9% to book a long term FD?
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.