According to a recent update on December 7, 2022, when the Reserve Bank of India (RBI) increased the repo rate by 35 basis points, the repo rate climbed to the 6.25% mark. In order to combat inflation, the RBI has increased the repo rate by 225 basis points since May, reaching 6.25% in FY23. The repo rate is intrinsically linked to the loan and deposit rates that commercial banks provide to retail investors since it is the interest rate imposed when commercial banks borrow money from the RBI. As a result, banks would raise their lending rates to reflect a rise in the repo rate and bring it on to individual investors. Almost all of the banks have increased interest rates on their fixed deposit products as a result of the RBI’s five consecutive hikes to the key lending rate. Analysts believe that the MPC may raise interest rates again in February 2023 before taking a break from rate hikes because, at its meeting in December, the MPC also decided to continue focusing on the withdrawal of accommodation to ensure that inflation remained within the target going forward while promoting growth.
Should investors book their fixed deposits now in light of the rising interest rates on bank fixed deposits, or should they wait for another unexpected RBI move? We’ll ask our experts to weigh in.
CA Manish P Hingar, Founder at Fintoo said “Since May 2022, the Reserve Bank of India has increased the repo rate by 225 basis points (bps) increasing the repo rate from 4.0% to currently 6.25%. When interest rates rise up banks immediately hike up their lending rates but the effect of rising interest rates on bank’s fixed deposits is not seen immediately because it is up to the banks to decide how much money they need to lend and whether it is necessary to raise interest rates on fixed deposits or not. But since over the period, banks require excess liquidity to lend money they raise their rates to attract investors to park their money with the banks.”
“It is evident that interest rates are close to their peak which is still a few months away so the likelihood of a further hike in interest rates cannot be ruled out completely yet. Please note that a major part of the interest hike in policy rate is done and most of it has already been incorporated into the fixed deposit rates, the likely hikes in the coming months may not be very substantial. Investors should avail the benefit of available attractive interest rates on fixed deposits and consider investing for a short to medium duration for next 2 to 4 years. Investors may also consider breaking their existing FDs and use the current opportunity to reinvest in new FDs offering higher interest rates,” said CA Manish P Hingar.
“On a precautionary note, it is advised that investors should not get carried away with the high rates offered by small finance banks as it is to be noted that in case a bank defaults, your money is only insured to the extent of ₹5 lakhs including the principal and the interest amount,” said CA Manish P Hingar.
Nitin Rao,Head Products and Proposition, Epsilon Money Mart said “Finally, the time for investing in FD is here. With RBI hiking rates, FD is emerging as an attractive investment option for investors, especially senior citizens. The street expects FD interest rates to inch towards the 8.5 – 9% mark soon. While inflation seems to have peaked and we can have a softer inflation going forward, there’s still scope for another 25 – 50 bps hike. Thus, all eyes will be on the February policy decision. Usually, there’s a lag between hikes and banks passing on the benefits. Thus, even though the deposit rates haven’t kept pace with the repo rate hikes, we are seeing banks raising interest rates now. The rates from smaller private banks and NBFCs are already seeing 8%+ deposit rates.”
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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