Fixed deposits: wait a while to lock in long-term FDs

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After the Reserve Bank of India raised the repo rate by 90 basis points in just over a month, most banks raised their lending rates. However, the transmission is slow for deposit rates because these rates are decided by banks’ asset-liability management committees after taking into account the needs for funds, the maturities of existing loans and prevailing market rates.

Currently, banks have raised their deposit rates within a range of 20 to 40 basis points depending on the mandates. Banks will raise their deposit rates at a higher pace once demand for credit picks up. However, the business deposit rate will rise faster as businesses seek funds for their business activities.

Bank deposits

When interest rates rise, short-term deposit rates rise first, followed by long-term deposits. So, if any of your term deposits mature in the next two months or so, it will be a good idea not to defer immediately and wait for the increased rate to be reinvested. Avoid locking deposits for long term duration as the Reserve Bank of India will further increase the repo rate to contain inflation.

Experts say that in a rising rate regime, laddering fixed deposits works well because maturing deposits will yield higher rates when reinvested. Individuals may consider investing in smaller financial banks as interest rates are higher than those of large banks. Under the Deposit Insurance and Credit Guarantee Corporation of India (DIGCC), deposits of 5 lakh are insured for principal and interest with all banks including small financial banks.

Company deposits

Although fixed deposit companies pay higher rates than banks, check the company’s ratings, analyze financial statements and its performance before submitting the check.

Companies also offer non-convertible debentures (NCDs) – secured and unsecured – to raise funds. Secured assets are asset backed, in which if the company is unable to meet its obligations, the assets are liquidated to reimburse the investors. Companies offering secured debentures pay lower coupons than unsecured companies. In case of unsecured NTMs, in case of default or liquidation of the company, investors will simply lose the money invested. In fact, NTMs are more liquid than corporate term deposits because they are traded on exchanges. However, to liquidate a business FD, you need to approach the business. Enterprise DFs are riskier than NTMs.

Since the interest rates on small savings are higher than those on bank deposits, three and five-year postal term deposits can be considered. For example, the interest rate on the Post Office term deposit account (5 years) is 6.7%, while the SBI 5-year deposit rate is 5.5%.

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