Deposit rates are falling. What should you do

Deposits rates have been falling over the past few months, much to depositors’ anguish. Many banks have cut the rates they offer on fixed deposits by 0.3-0.5 percentage points, even by a higher 0.75 percentage points in some cases.

Following SBI’s footsteps, many banks are now looking to link deposit rates to RBI’s repo rate, hence deposit rates can fall further in the coming months.

If you have always preferred safety, and parked your surplus funds in bank deposits, then the sharp cuts by banks are bound to hurt you. In particular, if you are a senior citizen who relies mostly on interest income on deposits to fund living expenses, you may have been hit hard by the sharp reduction in deposit rates in recent months.

With the RBI recently cutting its repo rate by a tidy 35 basis points (110 basis points this year), deposit rates are likely to fall further. How can you cushion yourself from the pain?

Lock in now

For starters, if you have surplus funds, don’t let them idle in your savings account. Remember, banks offer a meagre 3.5 per cent on your low value savings deposits. In case of SBI, its savings deposit rate (for over ₹1 lakh deposit) is linked to RBI’s repo rate — 2.75 per cent below repo rate — which implies a very low 2.65 per cent on savings deposits. Reports suggest that other banks are likely to link their deposit/loan rates to the repo rate soon.

Hence, if you are sitting on the fence waiting for fixed deposit rates to rise again, quit the wait. It will be sometime before the RBI starts to reverse its rate cut cycle and hikes rates again.

If you have a very short term horizon, moving to less-than-one-year FDs can straight away earn you a higher 6.5-6.75 per cent (even 7 per cent in certain banks).

Go for shorter tenure

But if you are not in urgent need of money, then you can extend your fixed deposit tenure and earn higher returns. So which tenure should you chose?

A two-year option at this juncture can work well, as it mitigates the uncertainty over reinvestment risk — the inability to reinvest at the existing rate. The shorter tenure can also allow you to cash in on any rate hikes two years or so. Given that interest rate cycles have become relatively shorter over the past two to three years, sudden reversal in rates (from rate easing now to hikes) cannot be ruled out.

Look out for best deals

Next, shop for the best rates, before banks start cutting rates more aggressively on their fixed deposits.

Over the past year, private banks and small finance banks have been offering higher rates than public sector banks. So even if you are comfortable with your neighbourhood public sector bank, don’t lock into just any rates.

Remember, if you have a running account (savings deposit) with a public sector bank, you can still open an FD account in other banks offering much higher interest rate — when it comes to fixed deposits rates matter more than operational ease.

So which banks offer the best deals in the up to two-year fixed deposits? (Note: Rates are subject to change, and hence check the latest rates before investing).

While most PSU Banks offer 6.5-6.75 per cent in this category of fixed deposits (Corporation Bank offers 7 per cent for 666 day-deposit), few private banks and small finance banks offer upwards of 8 per cent even now.

Lakshmi Vilas Bank, for instance, offers 8.4 per cent for 450 day-deposit. IDFC First Bank offers 8.5 per cent for two-year deposit. There are several other banks — such as DCB Bank offering 7.85 per cent for a 18 month deposit, RBL Bank 7.7 per cent for 1-2 year deposits, YES Bank 7.85 per cent for 12 month 10 days-20 days deposits — that offer good deals to consider.

Don’t ignore Small Finance Banks

There is a common misconception that Small Finance Banks are not for everyone. But this is not true. While they carry restrictions on their lending activity, there is so such curb on deposit taking.

In fact, few Small Finance Banks offer very attractive rates on fixed deposits. For instance, Fincare Small Finance Bank offers 8.75 per cent for fixed deposits of 21 month-24 month tenure. Jana Small Finance Bank offers 8.6 per cent for a fixed 2-year deposit (730 days). Suryoday offers 8.5 per cent for 1 year 6 months to 2 years deposits.

But remember small finance banks that are only now expanding their footprint across cities may not be able to offer you transactional comfort like your friendly neighbourhood bank. So do check the presence of these banks in your city before investing.

Split your deposits

Above all, don’t put all your eggs in one basket. Each depositor is insured only upto ₹1 lakh for both principal and interest under the Deposit Insurance and Credit Guarantee Corporation of India (DICGC). For calculating this limit, all deposits across branches of the same bank are aggregated.

Hence split your deposits across several banks. Aside from deposits in all Public Sector Banks, private sector banks, local area banks, Regional Rural Banks, Small Finance Banks and Payments Banks too are now covered by the DICGC.

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