A relatively risk-free instrument, fixed deposit (FD) generally become attractive in higher interest rate regimes. Details here:
The Reserve Bank of India increased the repo rate by 50 basis points, taking it to 5.4 percent. The latest move will make borrowing expensive, leading to an increase in loan tenure and equated monthly instalment (EMIs) higher. However, the good news is that the interest rates on deposits like FD, which were trending on the lower side for several years, will see a rise.
What happens to FDs when RBI hikes repo rate?
A relatively risk-free instrument, fixed deposit (FD) generally become attractive in higher interest rate regimes. For instance — in the last two policies, the central bank hiked the repo rate by 90 basis points and consequently deposit rates were increased by the banks.
Leading banks are now offering up to 6 percent interest on FDs of longer tenures.
Here are the latest FD rates offered by different banks:
Name of Bank
For General Citizens (p.a.)
For Senior Citizens (p.a)
State Bank of India
2.90% to 5.50%
3.40% to 6.30%
2.75% to 5.75%
3.25% to 6.50%
Kotak Mahindra Bank
2.50% to 5.90%
3.00% to 6.40%
Punjab National Bank
3.00% to 5.60%
3.50% to 6.10%
2.90% to 5.75%
2.90% to 6.25%
2.50% to 5.75%
2.50% to 6.50%
(These rates were decided before RBI's August 5 announcement and may change now)
Deposit rates are linked to the rate of inflation. Banks generally give positive returns to depositors.
So, what will happen to deposits now?
According to Adhil Shetty, CEO, Bankbazaar, depositors get higher interest on their fixed deposits. Chances are that small savings interest rates may also go up. Senior and very senior citizens will get additional 25 basis points to 50 basis points than general citizens annually.
"The banks are expected to raise deposit rates in a staggered way to ensure that their cost of funds don't escalate drastically," he said.
So, what should depositors do?
To maximise returns, investors may go for a short-term FD till the rates rise further. It's better to switch to a higher rate as soon as the short-term FD matures. Laddering is another best way to maximise your returns. It helps in spreading deposits in different tenors and rates, Shetty added.
Now, let's understand what is laddering with an example.
If Mr X has to invest a lump sum of Rs 10 lakh in a 5-years FD, he can divide it into smaller parts with the laddering technique. This can even be of Rs 2 lakh each across maturities ranging from 1 to 5 years. He can choose to invest smaller investments in shorter duration FDs and incrementally increase the quantum of investment into longer tenure FDs.
With this, Mr X will have FD maturing each year which would provide the liquidity buffer. In case of emergency, he can liquidate the smallest tenure FD, thus, minimising the amount lost in the form of penalties.
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