High bank fixed deposit (FD) interest rates may not last for long. Here is why

According to Amit Gupta, MD, SAG Infotech, investors planning to invest in fixed deposits should take this development into account and adjust their investment strategy accordingly.

“If the financial sector receives an excess of liquidity during the coming months, interest rates may drop, especially at the shorter end of the curve,” said Vinit Khandare, CEO and Founder, MyFundBazaar.

FD rates are expected to remain subdued in the next six months

“The two main reasons for the muted FD rates are the withdrawal of ₹2000 notes and the improving inflationary conditions,” said ProfessorVijay Victor, Assistant Professor & Co-Chair – Accounting, Economics and Finance, T A Pai Management Institute

Over the next 3-4 months, it is expected that the deposit base of the banking system will expand as a result of approximately 30% of the withdrawn notes being returned as deposits. If a fraction of these deposits remains with the banks at least for a few months, there is no need for them to increase the rates to attract new deposits. Additionally, the most recent inflation data, with a rate of 4.7% in April suggests a potential conclusion to the current cycle of rate hikes, added Professor Vijay Victor.

Traditionally, banks raise interest rates on fixed deposits when they face challenges in securing funds to meet the demand for loans. As per Amit Gupta, the liquidity situation in banks seems to be improving, as reflected by the overnight call money rate, which has stabilised

Additionally, the US Federal Reserve signaling a possible pause in rate increases and even a rate cut has influenced market expectations.

Other contributing factors include the decline in retail inflation and the downward shift in the yield curve. Short- to medium-term FD rates are anticipated to experience a decline, while long-term FD rates are expected to remain stable for the next few months.

Plan to invest in short- to medium-term FDs? Don’t wait. Do it now!

Khandara suggested that individuals planning to invest in short- to medium-term FDs should consider booking their deposits promptly. On the other hand, those considering long-term FDs have more time to make their decision, as rates are expected to remain steady for the next 3-6 months.

“For tenures up to three years, FD rates have primarily increased in the last year. Long-term FD rates have risen at a more moderate rate. Since these prices are anticipated to stay at their current level for 3-6 months, you may have more time to make a decision if you intend to book your FD for a lengthy period. However, it will be advisable to take advantage of the current high rates and book your FDs as soon as possible if you are planning to go for short- to medium-term FDs with tenure of up to 3 years, as there is a greater likelihood that rates will drop in such FDs,” said Abhijit Roy, CEO, GoldenPi

“FD rates in India have definitely peaked and have now only one way to go- downwards. All indicators point towards this,” said Dr Radhika Lobo, Program Chair and Professor of Economics, at Vidyashilp University, Bangalore.

So, those Indians, who have been opting for this safe haven of FDs are advised to make hay while the sun shines as the sun will set on these rates soon.

RBI keeps repo rate unchanged for the second time in a row

The Reserve Bank of India (RBI) on June 8 kept the repo rate unchanged at 6.5 per cent. Since May 2022, the central bank has raised interest rates six times, and this is the second time in a row that it has decided to keep the key benchmark policy rate unchanged. The interest rates on fixed deposits and other savings schemes are revised with a change in the repo rate. 

Updated: 12 Jun 2023, 12:26 PM IST