Higher FD rates will not lure equity market investors for now: Analysts

Stock market investors are unlikely to significantly move their investible surplus to more secure options, such as fixed deposits (FDs), in the near-term even as banks begin to offer higher returns on these instruments, said analysts. 

The hike in rates for FDs by banks follows the recent move by the Reserve Bank of India (RBI) to hike key rates to tame galloping inflation. The repo rate – the rate at which the RBI lends money to commercial banks – now stands at 5.40 per cent. With the latest round of hike by the central bank, the repo rate is now a tad above the pre-Covid level of 5.15 per cent.

“The deposit rate hike by banks is still moderate. A rate above 7.5 per cent can still see some investors move from equites to such deposits, but it will not be a quantum shift. At 7.5 per cent, the rate of return for secure instruments such as FDs, becomes relatively risk-free. So, those investors who book profit in equities can look to invest here. Retail investors have tasted blood in the markets over the past couple of years and will chase returns even if it comes with a bit of risk," said A K Prabhakar, head of research at IDBI Capital.

On their part, several nationalised banks have started to offer higher rates of return on fixed deposits. The country's largest lender, State Bank of India, hiked deposit rates. The bank, under a special offer, has launched a 75-day Utsav Deposit Scheme that is offering a return of 6.1 per cent for deposits with tenor of 1,000 days with an added 0.5 per cent for deposits in the name of senior citizens. 

Bank of Baroda has also launched the ‘Baroda Tiranga Deposit Scheme’ with two investment options – one that offers 5.75 per cent per annum for 444 days and another that offers 6 per cent interest on deposits for 555 days with an additional 0.5 per cent higher rate for senior citizens. Canara Bank also launched a similar scheme recently.

Over the past few years, the return from the stock market has been far higher amid abundant liquidity that poured in from foreign and domestic investors. On a calendar year basis, the S&P BSE Sensex and the Nifty 50 indices have returned between 14 per cent and 22 per cent each year between 2019 and 2021. In comparison, the rate of return by a one-year fixed deposit in a nationalised bank (SBI) has moved from 4.9 per cent in 2019 to 5.3 per cent in 2021, data show.

The shift in allocation from equities to instruments such as FDs even at the current rate of interest offered by the banks, according to G Chokkalingam, founder and chief investment officer at Equinomics Research, is not enticing enough for retail investors. A vast number of Indian retail investors, he believes, now have high risk taking capacity and their expectations on returns from any asset class, too, is very high. 

“A majority of investors will not shift significantly towards fixed income instruments just because interest rates are 50 basis points (bps), or even 200 bps higher. Historically, equity market investors have seen strong double-digit interest rates offered (by banks) still allocated to equities. A huge number of investors now expect minimum 15 per cent annualised returns, if not multi baggers within a year. Therefore, 5 per cent or 7 per cent interest rates on deposits will be unable deter over 11 crore retail investors from investing, especially across over 4,000 small and mid-and small-cap stocks,” Chokkalingam said.

Why investors don’t prefer FDs

• Several nationalised banks offer interest rates between 5% and 7% annually
• Over the past few years, the return from the stock market has been far higher
• The S&P BSE Sensex and the Nifty50 indices have returned 14-22 per cent each year between 2019 and 2021