In the past two years, the low interest rate environment has thrown many savers into a quandary. Fixed/term deposit rates have fallen across banks from March 2020 by 1-1.25 percentage points as a result of the Reserve Bank of India’s series of rate cuts.

This fall in term deposit rates is in continuation of the fall in deposit rates in 2019. Interest rates could fall more, with the RBI indicating it will do “whatever it takes” to support economic growth, which has been hurt badly by the pandemic.

Better bet

In this scenario, many savers are understandably looking to park their money in reliable options with relatively good returns. One such option is IDFC First Bank’s fixed deposit. The bank currently offers among the best returns in the commercial banks category on fixed deposits across various tenures for individuals and senior citizens.

Investors who have singed their fingers by investing in riskier debt options such as deposits of NBFCs and high-risk debt funds, and are looking for safer options to park their savings, can consider IDFC First Bank’s fixed deposits. With the increase in deposit insurance cover earlier this year, deposits in a bank up to ₹5,00,000 are covered.

For deposits of less than ₹2 crore, IDFC First Bank currently offers a relatively attractive rate of 7 per cent for a period of 181 days to less than year, while on deposits for various periods from one year till 10 years, the bank currently offers an interest rate of 7.25 per cent.

Compared with most of its peers, IDFC First Bank’s deposit rates stand out. On a term deposit of less than ₹2 crore, for a period of one year up to 10 years, ICICI Bank offers 5.15-5.5 per cent, HDFC Bank offers 5.25-5.5 per cent, while Axis Bank offers 3.35-5.75 per cent.

Even for shorter time periods such as 180 days or less, IDFC First Bank’s interest rates are relatively better than most peers. The bank offers 6.25-6.75 per cent on deposits with tenures of 30-180 days. Many other private banks offer 2.75-4.5 per cent on such deposits.

Like most other banks, IDFC First Bank offers an extra 0.5 percentage points over prevailing rates on its deposits to senior citizens (those above 60 years of age). This makes the bank’s deposits more attractive than some recent senior citizen fixed deposit schemes launched by banks such as SBI, HDFC Bank and ICICI Bank.

IDFC First Bank’s fixed deposits come with both regular interest payout (monthly, quarterly) and cumulative options. For deposits with monthly interest payout option, the interest shall be calculated for the quarter and paid monthly at a discounted rate over the standard fixed deposit rate.

Optimum period

Interest on IDFC First Bank’s deposits is calculated on simple interest basis on tenures up to 180 days. For deposits with tenure above 180 days, the interest is payable or compounded on a quarterly basis. Hence, going for a deposit of more than 180 days will be more beneficial as you will earn compound interest, and the effective yield will go up.

Say, you invest ₹1,00,000 for two years at 7.25 per cent in the cumulative options. The interest will be compounded quarterly, and the maturity value of the deposit will be ₹1,15,454 at the end of year two. The effective yield will be around 7.45 per cent thanks to the compounding effect.

Using the same example, for senior citizens, the interest rate will be 7.75 per cent and the maturity amount at the end of two years will be ₹1,16,593. The effective yield will be 7.98 per cent.

At this juncture, it may be advisable to choose a time period of 1-2 years. This way, in case the interest rates start going up in the future, you can choose to reinvest the amount at the end of the term in higher earning term deposits.

Premature closure

In case of premature closure of the fixed deposit, interest will be paid at the rate applicable at the time of booking the deposit, for the corresponding period for which deposit has remained with the bank; also, premature closure penalty (currently 1 percentage point) will be levied.

About the bank

IDFC Bank was formed in 2015 through the demerger of the infrastructure lending business of IDFC into IDFC Bank. IDFC First Bank came into being in December 2018 after the merger of IDFC Bank and Capital First. As on March 31, 2020, the entity has a loan book of ₹1,07,400 crore and a gross NPA ratio of 2.60 per cent and net NPA ratio of 0.94 per cent.

Extra for elders

For senior citizens, the interest rate on the bank’s deposits is 0.5 percentage points higher than the rates for others