A 50 basis points of hike in FD interest rate from 6.5% to 7% means that on each Rs 1 lakh FD for 5 years, you will end up getting Rs 3,436 additional interest payout.
Will FD interest rates touch the 8% mark?
8% interest on FDs is the psychological benchmark as any return above it is considered to be a decent return by a good number of FD investors. So, what is the possibility of deposit rates reaching the 8% mark?
The likelihood of FD rates touching 8% will depend on how long this rate hike cycle will continue. Though the repo rate has gone up substantially by 1.4% within a short period of 93 days and RBI has hinted at withdrawal of accomodative stance many experts feel that there is still a scope of 50-100 bps hike in coming 3-4 quarters.
“While some of the early signs of inflation moderation is visible, we believe that the external sector risks remain abound and to offset, at the margin, the increasing pressure on INR, RBI should frontload the rate hikes even as the overall terminal rate may not eventually be very high. We continue to expect 85bps hike in Repo rate to 5.75% by end 2022,” says Upasna Bhardwaj, Chief Economist,
A reliable signal for long term interest rate is the 10-year G-sec yield, which registered a peak of 7.475% recently on July 11, 2022. The rising yield hints towards higher rates going ahead. “We are not done with rate hiking cycle yet and we could brace for continued northward journey in rates. Withdrawal of accommodative stance has been maintained. We see this as a “no dovish” undertone policy contrary to markets expecting a dovish stance. Bond markets would now focus on incremental G-sec supply and take cues from global bond yields going forward. Staggered investment approach in fixed income stays,” Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company.
The depreciation of Rupee against USD has also been a challenge which may aid higher interest rates. “The case of magnitude of rate hikes in front of RBI is slightly more complicated by currency considerations, where I believe India will have to be directionally in line with global central banks, while the quantum of action to be suited for our own economy. With inflation drivers easing, I see Terminal Repo Rate in range of 6%-6.25% for now, and a longish period of pause post that,” says Akhil Mittal, Senior Fund Manager, Tata Mutual Fund.
The highest FD rate offered by conservative banks like
was having a spread of 1.5% and it was offering a rate 5.5% on 5 year tenure while the repo rate was 4%. If it maintains the same spread and if the repo rate touches 6.25% in coming months, the bank may raise the FD rate for general citizens at 7.75%. This means that rate for senior citizens may go up to 8.25% and in case the bank continues with special rate FDs for senior citizens with 80 bps higher rate, then they may get a rate of 8.55%.
Smaller banks will be much ahead in raising their interest rates. Many prominent smaller banks have started offering FD rate of 6.5% to general citizens and 7% or above rate to senior citizens. For instance, the highest rate offered to general citizen by
, and is 6.5% and senior citizens are getting 7% or higher return from these banks. has the highest rate of 6.65% while Duetsche Bank is offering 7% as the highest rate for general citizens.
The current situation is extraordinary in many ways due to the Covid-19 pandemic related liquidity infusion by many countries and hyperinflation led by the Russia-Ukraine war. So, the FD interest rates touching the 8% mark is a possibility in the near future. As the momentum of the interest rate hike looks strong it is not farfetched to expect the interest rate to reach closer to 8% within 1-2 years.
Slower transmission of rate hike in FDs
Whenever policy rates start going up it is the lending rates that see quicker transmission while the rate transmission is slower in FD rates. The repo rate was hiked by 0.90%, however, the deposit interest rate hike has been lower. There is usually a lag when the banks start passing on the benefit of a rate hike to the depositors. While some smaller banks have already raised the rates, bigger banks will be slower in doing so. The reason for delayed transmission of hike in deposit rate is that bigger banks already have sufficient liquidity and hence, competition for deposit is not very high.
However, going forward if the RBI keeps raising rates gradually, banks will be compelled to raise their deposit interest rates as well. Therefore, FD investors should keep this in mind that it may take long after the RBI is done with its series of rate hikes for the depositors to get the entire benefit.
Should you book long term FDs after current hikes?
Though a rate hike is welcome news for depositors, however, it comes with a fair share of dilemmas. Even though the direction of interest rate has reversed, however, nobody is sure where the rates will finally reach and how long will it take for interest rates to peak. If you wait longer to book your FD for a higher rate you will end up losing on current growing rates and if you book long-term FDs after only a few hikes, you may end up at the losing end if the rates keep growing later. We tell you how the interest rate is likely to move and how you can make the best out of the unfolding situation.
Should one wait for rates to cross 8% for booking long term FDs?
So, if you are looking to book an FD for the long term or a big FD is due for renewal, this may not be the right time to do so. In a growing rate scenario, it is better to book FDs with short tenure so that it can benefit from the hike during the investment period. So, booking an FD with a tenure of 6 months to one year could be a better strategy. Once these FDs mature and you get a better rate at the time of renewal you can book longer term FDs.