Fixed Deposits have been one of the most popular and trusted instruments of investment for hundreds of years. In recent times, conservative investors seeking guaranteed returns are attracted to such investments.
Conservative investors believe that money invested must also yield its rightful share of returns, but they prefer security over high returns. The FD interest rates in India do fluctuate for many reasons that include economic conditions, inflation, monetary policy changes, among others.
We have discussed, in the article, the current trends in FD interest rates prevailing in India, the factors that drive these rates, the recent changes in RBI policies, and how they compare with other investment options.
We have also included some insights into how investors should be making the best of the prevalent interest rates and how FDs can be part of the overall investment portfolio.
The fixed deposits have formed part of Indian investment cultures for the past several decades. Basically, one main reason for this was that they were considered safe in capital.
The FDs don’t feel the pain of market fluctuations as equities or mutual funds do, and it is therefore a very safe deposit avenue for most risk-averse investors, who are mostly retirees looking for a guaranteed return.
The other attractive feature aside from the safety net of FDs is the flexible tenures, which may vary from a minimum of 7 days to a maximum of 10 years. One tenure where an investor can choose to invest for the desired period.
Besides this, interest compounded on fixed deposits be it quarterly, half-yearly or yearly adds more hands to their attractiveness so as to take one’s wealth forward.
Banks and NBFCs offer FDs with varying interest rates against tenure, the sum of investment, and according to the policies of the respective institutions.
Broad economic considerations have brought fluctuations in FD interest rates overtime, and such trends are something an investor must consider when committing his money for the long term.
Current Trends in FD Interest Rates (2024) –
Interest rates in India on FDs, as of 2024, are in a gradual increase phase, having remained at the lowest ever for successive years during the pandemic years.
It can be attributed to the RBI’s consecutive gradual hikes of its repo rate to control inflation; thereafter, the banks have also followed the same trend and hiked the rates offered on their fixed deposits.
Normally, interest rates for regular account holders of large Indian banks are between 6% and 8%, whereas senior citizens get a premium of 0.25% to 0.75% on top of the above rates.
These rates are certainly not at par with the high yields thrown by speculative investments, but for a shrewd investor who wants to protect his capital with a decent return, the fixed deposits can act as a safe haven.
For instance, public sector key banks like SBI, PNB, and Bank of Baroda have come out with FD rates ranging from 6.50% to 7.25% based on the tenure. Private sector banks-HDFC, ICICI, and Axis Bank-have a tad higher rates that go up to 7.5% for select tenures.
Meanwhile, the smaller private banks and NBFCs also vie for deposits by offering aggressive interest rates at a level of 8% to 8.5% for typically such tenures as one to three years.
Also, the higher rate offered to them has been one of the most attractive features. With a view to attract senior citizens’ deposits lately, special FD schemes have been inducted by various banks with a rate up to 8.75% and thus helped the retirees in generating a stable income without risking their capital significantly.
Factors Determining FD Interest Rates –
The FD interest rates depend on a robust combination of macroeconomic factors which include inflation, the monetary policy made available by Reserve Bank of India and the overall demand and supply credit in the banking system. Let’s have an in-depth look at these factors:
1. Repo Rate of RBI Repo rate is the rate at which the RBI lends its money to commercial banks. This impacts the borrowing cost of banks and, consequently, the interest offered to depositors. When the repo rate is low, banks offer lower FD rates and the higher the repo rate, the higher are the FD rates of banks so that they may attract more deposits.
2. Inflation: it reduces the money purchasing power; so, the interest rates on FDs are changed suitably to keep up the gains. With high inflationary rates in hand, the RBI usually increases the repo rate to contain inflation, resulting in high FD rates.
3. Liquidity in Banking System: If the banks have excess liquidity-which is one can say that the banks have more deposits than the banks can lend out-they are likely to offer less FD rates as they do not necessarily need to attract more funds. On the contrary, if liquidity is tight, banks will raise the rate of FD to attract more funds.
4. Economic Growth: The general health of the economy determines the FD interest rates. When the economy grows more vigorously, the demand for credit increases further. A rise in FD rates makes it hard to source more deposits. During slowdowns or recessions, FD rates decrease further.
5. International Economic Cycles: Interest rate movements in the major economies, like the US, also affect the FD rates in India. Hence, if the interest rates globally are moving up, then it can have a relative cascading effect on the Indian interest rates also.
How the Recent RBI Policies Have Determined FD Interest Rates –
The RBI has been quite proactive in keeping a lid on inflation and pushing the economy forward, especially in the post-pandemic recovery phase.
In recent times, the RBI has undertaken a flurry of repo rate hikes to curb inflationary surges. Entering 2024, the repo rate stands at 6.5%, against the pandemic lows at 4%.
These hikes have raised the FD interest rates on average. Though higher FD rates help depositors, they are an indication of tighter monetary conditions, which raise the borrowing cost for firms and individuals.
It’s a balancing act the RBI is engaging in continuously: keep the inflationary pressure moderate but not kill economic growth in the process.
Another critical development is the launch of RBI Retail Direct, which opened up the possibility of retail investors investing in G-Secs. The interest rates offered by G-Secs are at par with fixed deposits and are even more attractive because it is not subject to the risks associated with a particular enterprise.
Although FDs take all forms and tenors with liquidity and are much more liquid than G-Secs, it has emerged as a risk-free option for mostly risk-averse investors, especially during low rates of FD.
Comparing FDs with Other Investment Options –
Although FDs provide safety and assured returns, investors should not be limited to just one investment avenue in order to achieve maximized returns depending on the risk involved and their goals. Let’s compare FDs with some other popular investment avenues:
1. Mutual Funds: Other options could be debt mutual funds that offer better returns than an FD with a slightly higher risk. Though not as secure as an FD, debt mutual funds may offer higher returns on a post-tax basis, more notably, to those in the higher tax brackets. Equity mutual funds have a higher risk but yield much higher returns over the long run.
2. Government Bonds: As mentioned above, government securities-G-Secs are a low-risk alternative to an FD. Again, its interest rates are competitive. However, such alternatives do require longer lock-ins than FDs and may not give liquidity (fluidity) equivalence of an FD.
3. Corporate FDs: A few NBFCs and corporates are offering FDs at a slightly higher rate of interest than the bank FDs. Again, the risks here are much more since these do not have DICGC insurance up to ₹5 lakh per depositor like the ones offered by banks.
4. Real Estate: For those having more capital and a longer investment horizon, real estate can pay off with vast profits. However, it brings liquidity risks and needs market research for profitable returns.
5. Stock: In case the risk appetite is higher, much higher returns can be garnered from the stock market than from fixed deposits. The disadvantage with the investment through stocks is market volatility, and investors need to have an in-depth knowledge about the business cycles and trends.
Maximizing returns from fixed deposits –
Even though fixed deposits assure returns, there are a few strategies that could help investors maximize their FD earnings:
1. Compare FD rates across banks: The interest rates offered by banks vary from bank to bank, and hence, rate comparisons are to be done before investing in them. Smaller banks and NBFCs are often more inclined towards giving more attractive rates compared to the bigger banks.
2. FD Laddering: Under FD laddering, the sum of investment is fragmented across various FDs of different time periods. So again here, it acquires liquidity while utilizing the benefit of long-term rates.
3. Reinvestment of Interest: Opt for cumulative FDs, wherein interest earned is also reinvested. Thus, it yields better returns in the long run as compared to non-cumulative FDs wherein interest is paid out periodically.
4. Look for Special FD Schemes: Banks come with schemes on special tenures with increased interest rates. Its scheme is available on specific periods; hence, look for them,
Conclusion –
Such options include the fixed deposits, which are the most popular and safest investment options in India, especially amongst risk-averse investors who have capital preservation as the fundamental aim, coupled with assured returns.
Yes, one can tell that current FD interest rates have already been skewed upwards on account of higher inflation, coupled with monetary tightening by the RBI, but still lag behind that for other options in investment opportunities such as mutual funds or stocks. Still, for a risk-averse investor, it is an integral part of any balanced portfolio.