The RBI has started cutting rates again. This means that now there is very little chance of the FD rates going up in the near future. So, what should you do now?
Almost after 18 months, the Reserve Bank of India (RBI) cut the policy rate by 25 bps on February 7, which may be good news for borrowers, especially for the people looking for home, car and personal loans. For investors, however, this seems to be a time for concern as interest rates on the various kinds of deposits are expected to go down again in the falling interest regime, depending on the RBI policy and the further rate cuts. This means most of their deposits will earn less in the months to come.
This is certainly bad news, especially for risk-averse investors who were waiting for the rates of fixed income instruments (like bank fixed deposits) to rise again for making further investments. However, as the deposit rates are unlikely to go up in the near future, what should be their best investment strategy now? Should they wait for an opportune time or lock their money in longer-term FD or other fixed income products at the prevailing rates?
Financial experts say that with the surprise rate cut by the RBI recently, one can safely assume that interest rates are not going to rise any time soon. Arguably they may not fall much as inflation targeting and curbing currency volatility remain a strong priority for the monetary policy committee.
“For fixed income investors this has two implications. Firstly, for those who wish to buy bonds or put money in fixed deposits, it would make sense to do it as soon as possible. Also, they should try and place money in fixed deposits of longer durations like 3 to 5 years as the chances of not getting the current interest rates in the near future is quite high. Secondly, for investors in debt mutual funds, it would be the right time to put some money in the schemes that are investing in bonds of longer-term maturity,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
This is opposed to the recommendation over the past several quarters to stick to floating rate or short-term income schemes only. The shift in recommendation to longer duration bond funds is because one can expect bond prices to remain firm on the back of a dovish RBI. “Hence some part of your debt portfolio can certainly shift to income or even gilt schemes with average maturity of more than 5 years,” suggests Kapur.
Some experts say that a 25 bps reduction in the repo rate might not automatically lead to lower fixed deposit rates in the near future. The gap between deposit growth rate and bank credit growth rate is likely to increase further, with credit demand expected to grow at a faster pace in the next fiscal.
“This will force banks, especially in the private sector and those with healthy balance sheets, to aggressively mobilise deposits through higher interest rates. However, depositors should not try to time their fixed deposit investment on the basis of interest rate movement. Delaying investment in the hope of availing higher FD rates in the future would mean keeping surplus money in savings account in the interim, and earn lower returns than the current FD rates. Given that fixed deposit rates are yet to top out, investors should prefer FDs offering higher rates in the 1-2 year tenure range,” says Naveen Kukreja, CEO & Co-founder, Paisabazaar.com.
Vineeta Sharma, Head of Research, Narnolia Financial Advisors Ltd, also says that it is a good time to invest in fixed income instruments like bank fixed deposits, “although at this point of time we prefer long-duration GILT fund if the investment horizon is more than 3 years. There are clear advantages of liquidity in terms of easy redemption. Also, returns will be comparable with indexation benefits in terms of tax treatment.”
Thus, invest your money based on your investment goals and risk appetite. You may also consult a good financial planner if you are unable to take a call. However, the decision should solely be yours!