If you are someone looking at parking your hard-earned money in a safer instrument, bank fixed deposits (FD) are a good option in the new year. Most banks have increased their FD rates by up to two percentage points over the last six months that taken the rates for 15-18 months deposits to around 7 per cent from approximately 5.5 per cent to 6 percent earlier.
This means, to give an example, on a Rs 50 lakhs retirement corpus deposit the annual interest rate accrued has gone up from Rs 2,75,000 to Rs 3,50,000. At one point, bank FDs used to be the favorites of a large section of investors especially senior citizens but over years, with falling interest rates and high inflation FDs lost sheen, causing some shift to mutual funds and equities.
But that could change in the new year. According to industry data the average fixed deposit rates fell from 8.5 per cent to 8.75 per cent in 2014-15 to 6.25 percent to 6.7 per cent in 2017-2018 and further down to 5.05 per cent to 5. 35 per cent in 2021-2022. But, from this point—thanks to RBI’s aggressive rate hikes since May—rates have gone up. From a returns’ perspective , equities and MFs rank higher.
But, it is also about the comfort of stable returns. Senior citizens who want park their retirement corpus for stable returns would rather prefer the good old bank FDs where returns are fixed and stability is assured (unless the bank itself collapses). What are the rates some big banks offer now on FDs? State Bank of India (SBI), country’s largest lender, now offers 6.75 per cent to deposits in the maturity of 1-3 years while for senior citizens, the rate is 7.25 per cent. Similarly, ICICI Bank offers 7 per cent to deposits up to 18 months tenure and 7.5 per cent to senior citizens.
Kotak Mahindra, HDFC Bank and Axis Bank too have increased deposit rates to 7 per cent for 18 months to 24 months Maturity bracket. Smaller private banks offer even higher rates. DCB Bank, for instance, now offers 7.5 per cent for deposits over 18 months and for more than 700 days , the bank offers 7.85 per cent. Dhanlaxmi Bank offers 7.25 per cent rate of interest for deposits with 555 days maturity.
With inflation beginning to fall, real returns (adjusting inflation) are turning positive. Inflation, as measured by the retail prices, fell to a 11-month low of 5.88 percent in November from 6.77 percent in the previous month. The fall in inflation in November follows a similar drop in October, allowing it to fall below the 6 percent upper bound of the Reserve Bank of India's (RBI) 2-6 percent tolerance band for the first time in 2022. For an average saver, say for example a senior citizen, who don’t have a longer investment horizon, equities and MFs may not be an ideal option.
In all likelihood, FD rates may inch up a bit further in the first half of the new year as tight liquidity begins to pinch the banks and credit growth picks up. Also, the remaining doses of RBI rate hikes will be key in deciding the course of deposit rates. The RBI may increase rates by 25-35 bps again as it completes the rate hike cycle to counter inflation, which means bank deposit rates are yet to peak. That’s more good news for FD holders.
(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)
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