FDs: What should you do with RBI still in status quo mode?

The Reserve Bank of India (RBI) kept key interest rates unchanged for another three months from October, 2021. The rates were last reduced in May, 2020 to 4%. This rate has a direct effect on rates at which banks lend to customers and accept deposits. Money9 offers some tips on how investors can enhance return on their deposits in this low interest rate regime.

Avoid longer term

If you are planning to invest in a new FD or going to renew your existing FDs, then it will be better to go for shorter term deposit, i.e. a maximum of two years so that your deposit is not locked at a lower rate for long time. Whenever the short to mid-term interest rates rise, you can start increasing the tenure of the FDs accordingly.

Divide into small chunks

If you want to make a new investment and want to renew the existing one, then go for small amount and small tenure. It will ultimately give you the freedom of changing your investment as per your choice. Suppose you are planning to invest Rs 50,000 in an FD. Then split it into three small chunks of Rs 20,000, Rs 15,000 and Rs 15,000 each and invest between six months and 18 months, advised Nilotpal Banerjee, a personal finance expert.

So, in the near future if the interest rate rises you can reinvest the amount for a longer time period. Because, the lock-in period of existing FDs is low so you have the flexibility. This will ensure that not all of your deposits are locked at the lowest interest rate at the same time and your average return is on the higher side.

Consider floating rate FD

If you do not wish to take any chances against the fluctuating interest rate cycle for shorter time frame, then floating rate FDs and floating rate bonds are good options, said Saibal Biswas, another PF expert based in Kolkata.

“If the interest rate is static as in the last one year, you will not get any advantage from floating rate FDs. Also for longer timer period consider a normal FD as the tendency of Indian market is gradually decreasing interest rate,” added Biswas.

Invest for short term

Whenever the interest rate makes a U-turn, the short to medium term interest rates are likely to rise first. As far as long-term interest rates are concerned, it will take a little longer for these rates to go up. So, prefer to invest in short term deposit up to 24-month tenure, said Nilotpal Banerjee.

Normal FD vs Floating FD

In a normal fixed deposit, individuals generally deposit a certain sum of money for a particular period of time, with this amount earning fixed interest. Withdrawing this amount before maturity is generally not permitted. Else a penalty is charged. In such cases interest rate’s fluctuation never play any role.

On the other hand, in floating rate fixed deposits account holders can withdraw certain sums of money without penalty after a specific period. But most important, the interest rate varies during the tenure multiple times as set by the bank, which is connected to the benchmark lending rate, said Saibal Biswas.

So, if the interest rate is hovering within a range of 100 basis points or more it is always better to go for floating rate FDs than normal one, said Nilotpal Banerjee.