Begin locking into best FD rates available, take limited exposure to SFBs

Since predicting peak rate is impossible, deploy in tranches over the next few months

With credit growth expected to pick up during the festive season, banks, which until now have been slow to hike their fixed deposit (FD) rates, are now wooing depositors with better rates. Many of them, like State Bank of India, Bank of Baroda, Canara Bank, etc. have announced branded schemes (Utsav, Tiranga, and so on) for specific tenures.

Begin locking into rates
 

Experts believe interest rates are now close to the peak. The repo rate may at best rise by another 50 basis points (bps) by the end of this year before it stabilises.

“If the rate you’re getting is about 7 per cent, lock into a medium or long-term tenure. But if you are getting a lower rate, then invest for a couple of months now and reinvest at a higher rate when those FDs mature,” says Adhil Shetty, chief executive officer (CEO), BankBazaar.com.

Other experts suggest spreading your bets. “If you get a good rate, deploy part of the amount you have now and the rest over the next few months. The chances are that interest rates will rise by another 40-50 bps. But waiting could be risky. If, say, there is a ceasefire between Russia and Ukraine, that could overnight cause yields to cool significantly,” says Arnav Pandya, founder, Moneyeduschool.

He adds that given the wide variation in FD rates, investors must shop around.

Opt for floating rate FDs?

Banks are promoting floating-rate term deposits, linked to external benchmarks like repo, T-Bill, and G-Sec rates. Their advantage is that the benefit of an increase in the benchmark rate gets passed on automatically to customers.

   

According to Naveen Kukreja, co-founder & CEO, Paisabazaar, “Floating-rate FDs are best suited for rising interest rate regimes.”

A passive investor may find this product suitable for the long term for averaging out his return across the rate cycle.

However, these deposits have a couple of shortcomings. “Banks usually offer lower interest rates on floating-rate FDs than on their regular ones. Some like SBI also offer limited choice in terms of tenures—maximum three years—for their floating-rate FDs,” says Kukreja. 

According to Pandya, one should opt for these products when interest rates are low and likely to rise in the future. “Now that rates are near the peak, investors should lock into longer-term, fixed-rate FDs,” he says.

When interest rates begin to fall, the rates of these FDs will fall. If interest rates within the economy are expected to decline steeply, the investor may want to exit them prematurely. Hence, investors must find out the penalty levied on premature exit.

If the interest rate with fixed rate products is comparable, then go with a player that has stated both its benchmark and the spread over it transparently. Also, compare the interest rate reset frequency. “Longer the interest-rate frequency, slower would be the transmission of rising interest rates to depositors,” adds Kukreja.

According to Pandya, less savvy investors should opt for the simplicity of a fixed-rate product.

Take limited exposure to SFBs

Several small finance banks (SFBs) are offering around 7.5 per cent. Many investors may want to take the benefit of these rates.

  

SFB deposits do enjoy a certain measure of safety. “Currently, 11 of the 12 SFBs have been categorised as scheduled banks. Depositors of SFBs categorised as scheduled banks come under the cover of the depositor insurance programme provided by Deposit Insurance and Credit Guarantee Corporation (DICGC).”

This programme covers cumulative deposits of up to Rs 5 lakh of each depositor, including their current and savings account, and also fixed and recurring deposits, in case of bank failures. Both the interest and principal components are covered. Moreover, the Rs 5 lakh cover applies separately to the deposits held with each scheduled bank.

However, these are, by definition, small banks which could get into trouble. “As a prudential measure, spread your money across different banks and types of banks,” says Pandya. He suggests limiting exposure to SFBs to 25 per cent of one’s total investment in FDs. Moreover, exposure to any one SFB of principal plus interest shouldn’t exceed Rs 5 lakh.