A fixed deposit is a secure investment choice that guarantees fixed interest rates and special rates for senior citizens. It is not associated with market-related risks, offers income tax deductions and a variety of interest payment options. When setting up a fixed deposit account or renewing an existing one, it is crucial to compare the prevailing interest rates offered by various financial institutions.

Irrespective of the turbulence in the stock markets, fixed deposit investors appear to be doing well because almost all banks now offer deposit rates that outpace inflation. Banks raised the interest rates on FDs across all investment tenures as RBI hiked its key repo rates six times during FY23.

Decadal low FD interest rates have been a major source of financial hardship for senior citizens, whose primary source of regular income comes from FDs. The fact that banks and other financial institutions have now begun to hike their FD interest rates indicates that better days are finally on the horizon.

Thanks to the new deposit pricing, depositors can now open an FD with attractive rates with public sector banks. The average rate of interest for the same ranges from 7-7.25% p.a. on tenors ranging from 200 - 800 days. On the other hand, smaller private banks and microfinance companies offer the highest interest rates for 3-year fixed deposits. The average interest rate for three-year FDs among the top ten banks is 7.5% p.a.

FD Rates Have Not Yet Fully Been Revised

Lenders are fast to pass on increased rates to borrowers if the repo rate is raised, especially in the case of loans with a repo-linked floating rate. Unfortunately, there is consistently a delay in providing fixed deposit account investors with the benefits of the rate increase. According to the RBI data, banks were offering FDs with minimum and maximum interest rates of 5% p.a and 5.60% p.a in April 2022. As of January 27, 2023, the minimum interest rate has increased to 6% p.a, an increase of 1%, and the maximum rate has increased to 7.25% p.a, an increase of 1.65%.

This demonstrates that FD interest rates with tenures of more than a year is far from approaching the repo rate increase of 2.25% seen. While the maximum interest rate has been transmitted at a high pace, the minimum interest rate has not yet experienced the same level of transmission. This shows that many banks agree with their current minimum interest rates. They have not yet felt pressure from the market to raise their rates, which may occur in the upcoming months.

Is This the Right Time to Invest?

Most indicators suggest that the current repo rate rise cycle is about to peak. Yet, the increase in FD interest rates may last for a while longer. It is not necessary that all the banks will increase their FD interest rates at the same time as the repo rate is being increased. The banks will need more time before raising their rates further. The much-anticipated monetary policy in April 2023 will provide a more concrete discretion about the same.

Hence, it would be wise to wait two to three months before investing in a sizable fixed-income investment with a long term. You can also divide your FDs into two to three parts and invest some of it immediately and the rest over the course of three months. It may be smart to start building your FD ladder now if you desire to do so. You can divide your principal into three equal pieces and reserve each for one, two, and three years, respectively. You can reinvest that money for three years when the one-year fixed deposit account matures the following year. You can do the same thing when the next fixed deposit account matures the year after that.

If you have an old, long-term fixed-income investment that is earning a low interest rate, now might be the ideal time to liquidate it and reinvest the proceeds. Before doing this, though, you must conduct a net benefit analysis.

NBFCs and smaller private banks, on the other hand, have a speedier rate transmission system and offer substantially greater rates than larger banks. So, if you want to take advantage of the higher FD returns, you must ensure that your investment is protected by the insurance provided by DICGC.

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