The RBI is widely expected to cut repo rate in the upcoming monetary policy meeting to be held on June 6, 2019.
The RBI is widely expected to cut repo rate in the upcoming monetary policy meeting to be held on June 6, 2019. A reduction in repo rate means the cost of borrowing from the central bank by the banks at large will fall. Repo rate is the rate at which banks borrow money from the RBI.
When money will be available at a lower cost, banks will no more offer fixed deposits at the existing rate of interest. Therefore, after the repo rate cut, if it actually happens, banks are expected to lower their FD rates. With lower rates to offer on their deposits, the banks would be in a position to lower their lending rate as well.
Here, we look at three segments of the banking industry and see at which tenure, one can get a high or the highest rate of interest.
A. Front line commercial banks
B. Other commercial banks
C. Small Finance banks
1. Front line commercial banks
The strategy should be to diversify one’s funds into FDs of varying maturities through the ‘laddering’ approach. In doing so, the investors take care of liquidity risk and the reinvestment risk. Currently, few prominent banks are offering the following rate of interest:
SBI bank FD rate is 6.8 per cent and 6.95 per cent on its 5 year ( 3 to less than 5 years) and 10-year deposit respectively.
ICICI bank FD rate is 7.25 per cent and 7 per cent on its 5 year and 10 year deposit respectively.
HDFC bank FD rate is 7.25 per cent and 6.5 per cent on its 5 year and 10 year deposit respectively.
Axis bank FD rate is 7.25 per cent and 7 per cent on its 5 year and 10 year deposit respectively.
Bank FD rates (5-10 years)
Allahabad Bank: 6.50%
Andhra Bank: 6.50%
Axis Bank: 7.00%
Bank of Baroda: 6.70%
Bank of India: 6.50% (5-8 years)
Punjab National Bank: 6.25%
Canara Bank: 6.00% (5-8 years)
Central Bank: 6.55%
HDFC Bank: 6.50% (5-8 years)
ICICI Bank: 7.00%
IDBI Bank: 6.25%
State Bank of India: 6.85%
2. Other commercial banks
Among the other commercial banks, the two banks as below are offering a high rate of interest on these tenures:
18 months: 8.15%
36 months: 8.25%
24 Months to less than 36 Months: 8.05%
3. Small Finance Banks
As compared to leading commercial banks, the new stream of Small Finance Banks offer competitive rates of interest on their FDs and even on their savings accounts. While opening bank accounts is almost instant if one uses Aadhaar card as the KYC document, otherwise also the account opening process is faster in these banks. It is, however, not necessary to open a savings account while investing in the bank FD.
Ujjivan Small Finance Bank
799 Days: 8.60%
Au Small Finance Bank
24 Months 1 Day to 36 Months: 8.10%
Utkarsh Small Finance Bank
456 Days to less than 2 years: 9.00%
Capital Small Finance Bank
400 Days: 7.85%
Fincare Small Finance Bank
24 Months 1 Day to 36 Months: 9.00%
Equitas Small Finance Bank
2 years 1 day to 3 years: 8.55%
Jana Small Finance Bank
3 years: 9.00%
ESAF Small Finance Bank
365 – 727 days: 8.50%
Suryoday Small Finance Bank
950 Days: 9.00%
North East Small finance Bank
950 Days: 9.00%
What to do
Note that the interest from bank FD is fully taxable as per one’s tax slab. Illustratively, for someone in the highest income slab paying a tax of 31.2 per cent, a 6.5 per cent bank FD will translate into a post-tax return of about 4.47 per cent, barely matching inflation! Those in lower income slabs, ultra-conservative investors may still make use of the opportunity emanating from Small Finance Banks.
Although predicting the movement of interest rates is a difficult task, investors may use the current opportunity to diversify FDs across tenures. This, therefore, could be the right time to lock-in funds at the existing rate of interest as the interest rates are likely to move downwards.