In the week gone by, the RBI once again paused rates in its monetary policy meeting. The central bank is still adopting a stance of ‘withdrawal of accommodation’ mainly due to inflation being above its desired target of 4 per cent, driven up by food inflation in recent months. While this indicates that rate cuts are a bit further away, it may not be wrong to assume market interest rates have peaked, with the repo rate staying put at 6.5 per cent since February 2023.

Of course, no one can predict shocks which may alter the rate trajectory. But for now, it is prudent for investors with a lower risk appetite to lock into current rates across tenures through fixed deposits (FDs).

In response to the rate hike cycle which began in May 2022, interest on FDs has seen an uptick. Data from RBI shows that FD rates of five major banks, for instance, have moved up to a range of 6-7 per cent across tenures in 2023-24, from 4.9-5.5 per cent in 2020-21. Outside of these, many public and private bank FDs are offering rates over 7 per cent currently. Some Small Finance Banks (SFBs) such as Equitas, Fincare and Suryoday score even better, with upwards of 8 per cent interest on FDs in some tenures. Top-rated NBFCs too give over 8 per cent returns in select pockets.  

Investors who already have exposure to SFB FDs can consider locking into FDs of top-rated NBFCs for diversification purposes. Keep in mind that locking into a shorter tenure when rates are at a peak pegs up the reinvestment risk. This means that when the FD matures, you could be faced with lower rates if you want to re-invest in FDs. While no one can predict the length of a rate cycle, a better strategy could be to go for longer tenures at this juncture.

Here are a few NBFC FDs from stable and established players in the industry that you could sign up for. All our suggestions are for the cumulative option.

AAA Rated choices

Bajaj Finance’s special tenure deposit of 42 months, which offers 8.6 per cent interest, is a hands-down choice for investors looking for high rates, without taking much risk. This rate is the highest for any tenure across AAA rated NBFCs such as Bajaj, Mahindra, Sundaram, Sundaram Home, and LIC Housing Finance. In comparison, Bajaj’s own 44-month FD – which is just two months higher – offers a lower 8.35 per cent and its regular 48-month ie 4-year FD earns only 8.05 per cent. Moreover, for the same 42-month period, AA+ rated Shriram Finance fetches only 8.23 per cent.

Hence, investors with investment horizon of 3-4 years, but without a strict timeline in mind can invest in the 42-month deposit, which is named ‘Bajaj Finance Digital FD’.

However, if you do have a strict horizon linked to any financial goals which may be coming up, both Bajaj and Mahindra Finance offer 8.05 per cent for 36/48/60-month deposits.

AA+ rated choices

Shriram Finance offers 8.27 per cent on its special tenure 50-month ‘Jubilee Deposits’. These deposits were launched last year to commemorate the company’s 50th anniversary. There are no comparable tenures among other NBFCs discussed in this article, and hence you could consider parking some portion of your surplus here if the horizon suits you.  

For other tenures, Shriram Finance rightly offers higher rates than Bajaj or Mahindra Finance in return for higher risk it entails due to its lower credit rating. Shriram’s 30-month deposits fetch 8 per cent returns, higher than 30-month FDs of AAA NBFCs – Bajaj and Mahindra Finance.

Similarly, on regular tenures of 36 and 60 months, Shiram’s rates stand at 8.18 and 8.27 per cent respectively, compared to the 8.05 per cent from AAA NBFCs. Note that Shriram offers an additional 0.10 per cent for women depositors and dosen’t have a 48-month deposit.

Where these NBFCs score

With most SFBs offering only 8.25 per cent in the 3-5-year tenure, NBFCs deposits stand out as better options in this timeframe, for slightly higher risk than banks. Another advantage of investing in FDs from Bajaj, Mahindra and Shriram Finance is that these NBFCs provide end-to-end online processing for FDs.

On the other hand, it can be a bit of a hassle with SFBs, where branches are not as widespread. Suryoday, for instance, offers good rates but online investing is not possible. With Equitas, only one FD per customer is allowed through the digital channel with a cap of ₹1 lakh. While the deposit is done on Aadhaar based e-KYC, the depositor needs to go to the branch within 12 months of opening the account with KYC documents for mandatory personal verification.

Key takeaways
Use top-rated NBFC deposits for diversification
On-boarding easier than most SFBs
Go for longer tenures to avoid reinvestment risk