Good ol’ FDs are back as an attractive option for savers

“The equity and debt markets are volatile, the crypto market is very uncertain and real estate is not very liquid. Gold prices, on the other hand, are sliding,” Sridharan said. “In such a scenario, depending on the investment horizon and risk appetite, we are bound to see a lot of investments going back to conventional instruments like (bank) fixed deposits.”

Selloff in riskier assets

Riskier asset classes, like stocks and cryptocurrencies, across the globe have seen a sharp selloff in recent sessions as US inflation jumped to a fresh 40-year high in May, raising bets of aggressive rate hikes by the Federal Reserve in the coming months.

In contrast, FD rates in India are slowly inching higher after the Monetary Policy Committee hiked the repo rate by 90 basis points in May and June, marking the beginning of higher interest rates in the country. One bps is one-hundredth of a percentage point.

Bajaj Finance increased the interest rates on FDs by up to 20 basis points (bps). With this increase, depositors can earn a cumulative return of 7.20 percent on deposits of 36 -60 month tenor.

State Bank of India, the country’s largest lender, also hiked FD rate for some tenors by 15-20 bps with effect from June 14. Recently, Punjab National Bank, ICICI Bank, Kotak Mahindra Bank, and Axis Bank have hiked FD rates.

A fixed deposit allows investors to park funds with banks or NBFCs for a fixed term. Investors earn returns at a fixed interest rate that is determined by the interest rate in an economy. Such investments are immune from market fluctuations and the returns are guaranteed on maturity. Hence, these investments are preferred by senior citizens and retired employees.

Take, for example, Vinod Shinde, a Mumbai-based 62-year-old retired bank employee. Over the last few years, he prefers to park his savings in FDs and mutual funds.

“Because I am retired, I cannot invest my life-time savings in riskier assets like stocks,” said Shinde. “FD investments are secure, and now with rates rising, the incentive to increase investments into these assets has risen. Although the rates are not very high at present, there is a likelihood that rates will rise in the coming days and fetch better returns.”

FD rates to edge higher

In India, while lenders are quick to pass on rate hikes to loan borrowers, the pass-through to FD rates comes with a lag, depending on liquidity and how far banks and NBFCs are willing to sacrifice their net interest margins.

“Owing to a combination of repo rate hikes and sharp changes in banking system liquidity, which is coming close to neutral, overall rates in the system have been going higher. In addition, demand for credit has been showing good traction, driven largely by a surge in working capital financing,” said Soumyajit Niyogi, director, core analytical group at India Ratings & Research.

“The incremental credit deposit ratio has turned stressed. To address that, banks have no choice but to increase term deposit rates,” added Niyogi.

Since there is adequate liquidity in the system, banks do not have to focus aggressively on getting retail FDs for their needs. However, once the RBI begins to suck out more liquidity from the banking system, banks may have to lure customers with higher FD rates to park their funds.

“It is a fact that FD rates are on an upward trajectory and they are expected to rise in the future,” said Punit Patni, equity research analyst at Swastika Investmart. “Very risk-averse investors or investors having an urgent requirement or dependency on interest-based income may look to invest at current rates.”

Positive real returns coming soon?

In India, interest rates had been stable for quite some time prior to the out-of-turn May policy. With the RBI looking to balance the economic pressures and to increase interest rates further, there is a likelihood that banks will be forced to look at FD rate revisions more frequently than before.

The RBI is expected to hike the repo rates by another 25-40 basis points in its August policy. If FD rates are increased further, it would make it more lucrative for investors to park their surplus funds in this instrument.

Currently, the real returns from fixed deposits, or returns minus inflation and taxes, are in negative territory. This means that the rate of inflation is higher than the return on FD rates. However, if rates continue to edge higher, these returns could enter a positive territory as the rate hike cycle becomes more entrenched.

“It is very much possible that by the middle of next year, we will get into the positive return territory when it comes to investments in FDs,” said Kunal Sodhani, AVP, Global Trading Center at Shinhan Bank India. “Second tier banks may already start offering 8 percent FD rate as soon as the repo (rate) comes near 6 percent from 4.90 percent currently,” he said.

So what should investors do?

Experts said that investors could consider laddering, or a way by which one can stagger investments into multiple accounts of varying intervals to earn high returns with regular liquidity.

“If rates reach 8 percent, investors may want to lock in for the long term. They may also look at floating rate deposits which adjust their rates as per the market scenario,” said Adhil Shetty, chief executive office at BankBazaar.com. “Most importantly, they need to look beyond FDs if they want to beat inflation.”

According to Swastika Investmart’s Patni, investors could wait for some time to let the interest hike cycle play out. They could also look to park their funds in recurring deposits or liquid funds, or very short-term FDs in the current scenario, he added.