After the Reserve Bank of India increased the repo rate by 90 basis points in a little over a month, most banks have hiked their lending rates. However the transmission is slow for deposit rates as these rates are decided by banks’ asset liability management committees after factoring in the requirement of funds, maturities of existing loans, and the prevailing rates in the market.
As of now, banks have increased their deposit rates in the range of 20 to 40 basis points across tenures. Banks will increase their deposit rates at a higher clip once credit demand picks up. However, the rate on corporate deposits will increase faster as companies will look for funds for their business activities.
When interest rates rise, deposit rates of short tenures rise first, followed by long-tenure deposits. So, if any of your fixed deposits are maturing in the next two months or so, it will be a good idea not to roll over immediately and wait for the increased rate to reinvest. Avoid locking-in deposits for long-term tenure as the Reserve Bank of India will increase the repo rate further to rein in the inflation.
Experts say, in a rising rate regime, laddering of fixed deposits work well as the maturing deposits will fetch higher rates at the time of reinvesting. Individuals can consider investing in small finance banks as the interest rates are higher as compared with large banks. Under the Deposit Insurance and Credit Guarantee Corporation of India (DICGC), deposits of `5 lakh are insured for both principal and interest with all banks, including small finance banks.
While company fixed deposits pay higher rates than banks,do check the ratings of the company, analyse the financial statements and its performance before submitting the cheque.
Companies also offer non-convertible debentures (NCDs) —secured and unsecured—to raise money. The secured ones are backed by assets, wherein if the company is unable to fulfil its obligations, the assets are liquidated to repay the investors. Companies offering secured debentures pay lower coupons than non-secured ones. In case of unsecured NCDs, in case the company defaults or faces liquidation, investors will simply lose the money invested. In fact, NCDs are more liquid than corporate fixed deposits as they are traded in the stock exchange. However, to liquidate a corporate FD, you have to approach the company. Corporate FDs are more risky than NCDs.
As interest rates on small savings are higher than bank deposits, one can look at three- and five-year post office term deposits. For instance, the interest rate on Post Office Time Deposit Account (5-year) is 6.7% while SBI’s 5-year deposit rate is 5.5%.