Why are current interest rates high?
To fight high inflation, many central banks across the globe, including India, hiked interest rates to multi-year highs. The Federal Reserve has hiked interest rates to multi-decade highs in the US. As a result of high interest rates, inflation in many economies has come down.
View Full Image
(Source: Trading Economics)
As seen in the above image, in the last one year, the US inflation rate has fallen from a high of 7.1% (November 2022) to 3.2% (October 2023). In 2024, if the US inflation rate continues to trend down to or below the US Fed target rate of 2%, the Fed is expected to cut interest rates. Some experts predict the US economy may fall into a recession in 2024. If that happens, the Fed will have to cut interest rates to boost the US economy. Whenever the US Fed cuts interest rates, the RBI is also expected to cut interest rates.
How can you benefit from current high interest rates
Consider allocating some additional money to fixed income in 2024 to benefit from the current high interest rates. Some of the financial products that you may consider include the following.
Bank Fixed Deposits
The interest rates offered by many banks on their fixed deposits are at multi-year highs. Most big banks are offering interest rates in the 6.5% to 7.5% p.a. range on fixed deposits with tenures in the 1-4 years range.
Small finance banks (SFBs) are offering interest rates in the 7.5% to 8.5% p.a. range on their fixed deposits. Some people worry about the security of their money with SFBs. An accountholder’s deposits of up to Rs. 5 lakhs with every bank are insured by the Deposit Insurance Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India.
The fixed deposit returns are specified at the time of making it, and stay constant throughout the tenure. Hence, there is no stock market-like volatility in the returns.
The interest rates offered by some SFBs are as follows.
| SFB Name | Fixed deposit tenure | Interest rate (p.a.) |
| Suryoday SFB | Above 2 years to 3 years | 8.60% |
| Jana SFB | Above 2 years to 3 years | 8.50% |
| Equitas SFB | 444 days | 8.50% |
| Ujjivan SFB | 80 weeks (560 days) | 8.25% |
| AU SFB | 24 months 1 day to 36 months | 8.00% |
(Source: Websites of above SFBs)
Note: The above interest rates are as of 26th November 2023.
To enjoy the benefits of the above high interest rates, consider investing some money in fixed deposits of either SFBs or other banks.
Corporate Bonds
In the above section, we saw how banks, particularly SFBs, are offering good interest rates. Currently, many corporates are offering even better interest rates on their bonds. You will come across some corporate bonds offering interest rates in the 8% to 12% p.a. range. However, before deciding to invest in corporate bonds, apart from the coupon rate, some of the factors that you should consider include:
a) Whether the bond is secured or unsecured
b) Credit rating
c) Liquidity (will the bond be listed on the stock exchanges)
d) Does it suit your risk profile
e) Bond tenure and whether it matches your investment tenure
You may invest in corporate bonds through SEBI-registered Online Bond Platform Providers (OBPP). Apart from investing in corporate bonds, you may consider investing in government bonds if you are looking for a safe option. As of 24th November 2023, the yield on the 10-year government bond is 7.27%.
Debt Mutual Funds
In the above section, we saw how you can invest in high-yielding bonds. However, if you are not sure which bond to invest in, you may go with debt funds. Debt mutual funds offer you the combination of current high accruals (due to high bond yields) and potential capital gains when interest rates go down in future.
Interest rates and bond prices have an inverse relationship. When interest rates move up, bond prices move down, and vice versa. In the future, interest rates are expected to drop, resulting in bond prices increasing. Hence, there is an opportunity to make capital gains.
The sensitivity of bond prices to interest rate movement depends on the bond tenure. Bonds with higher tenures are more sensitive to interest rate movements than bonds with lower tenures.
The choice of debt mutual funds for investment includes corporate bond funds, credit risk funds, gilt funds, funds based on duration (short, medium, long duration funds), dynamic bond funds, etc.
Government Small Savings Schemes
If you are looking for fixed-income products with the highest safety, consider Government Small Saving Schemes. The interest rates on these schemes for 1st October 2023 to 31st December 2023 are as follows.
| Financial product | Interest rate (p.a.) |
| 1-Year Time Deposit | 6.9% |
| 2-Year Time Deposit | 7.0% |
| 3-Year Time Deposit | 7.0% |
| 5-Year Time Deposit | 7.5% |
| 5-Year Recurring Deposit | 6.7% |
| Senior Citizen Saving Scheme | 8.2% |
| Monthly Income Account Scheme | 7.4% |
| National Savings Certificate | 7.7% |
| Public Provident Fund Scheme | 7.1% |
| Kisan Vikas Patra | 7.5% |
| Sukanya Samriddhi Account Scheme | 8.0% |
(Source: dea.gov.in/)
Make the most of the current high interest rates
Depending on your risk profile, investment time horizon, liquidity requirement, etc., you can choose from the various fixed-income products to make the most of the current high interest rates. However, the current high interest rates will not last for too long. Experts predict the interest rates may drop in the second half of 2024, if not earlier. Hence, you may allocate some additional money to fixed income in 2024 and lock in the high interest rates.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.
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!
Download The Mint News App to get Daily Market Updates.
Published: 13 Dec 2023, 08:56 AM IST