As RBI keeps rates steady, is this the last chance to lock fixed deposits at high interest rates?

This is believed to be either the last or perhaps second last meeting before the interest rates are eventually slashed after a long hiatus. A Reuters poll predicted that the RBI is expected to cut rates in the Sept quarter. Notably, the banking regulator had raised the repo rates by a cumulative of 250 basis points before keeping them unchanged since Feb 2023. 

So, the current time may be the most opportune time to lock fixed deposits (FDs) for a long time.

We share key reasons for the same here:

Inflation under control: Inflation continues to  be under control. RBI maintains the policy stance at ‘withdrawal of accommodation’. 

The RBI governor said, “When CPI inflation had peaked at 7.8 per cent in April 2022, the elephant in the room was inflation. The elephant has now gone out for a walk and appears to be returning to the forest,” said Das.

In view of this, the chances of raising the interest rates further are very slim, and going forward, the rates will only come down after having stayed the same since Feb 2023.

Right move to lock the deposits at higher rates: When you lock your fixed deposits at higher rates, then even when the interest rates fall during the tenure, you continue to earn a higher rate of interest. 

For instance, when you lock a three-year FD at 7 percent per annum with HDFC Bank, you stand to earn interest at this higher rate even when the rates decline to 6 percent, say, one year later. 

As a result, you will continue to earn an extra 1 percent on your fixed deposit during the last two years of tenure. For instance, if the FD amount is ₹5 lakh, an extra 1 percent for two years amounts to ₹10,000. And when the FD is booked for ₹10 lakh, an extra 1 percent can make you richer by ₹20,000 in two years. 

Debt portion of portfolio: Investors tend to invest the debt portion of their portfolio in fixed deposits. And when overall interest rates fall in the economy, there will be fewer fixed income opportunities in the market. 

As a result, one would either block money in the low-paying instruments or would raise allocation to riskier assets. So, it is better to invest money in the fixed income instruments in order to stay true to the portfolio.

ALSO READ: RBI allows UPI payments at CDMs for cash deposits, says Guv Shaktikanta Das

Flexibility of redemption: Although it is not recommended to redeem your fixed deposit before maturity, but if there is an urgent need of money either for personal emergency or to redeploy the funds elsewhere, there is always an option to redeem your deposit without having to incur any loss. 

So, the flexibility offered by term deposits is a win-win situation for investors. 

All in all, if you are contemplating booking a fixed deposit for a long tenure, this may be the right time to do so. Because you never know when the rates start declining.

Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related decision.

Milestone Alert!
Livemint tops charts as the fastest growing news website in the world 🌏 Click here to know more.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it’s all here, just a click away! Login Now!

Published: 05 Apr 2024, 04:33 PM IST