Save Smart: 3 ways to benefit from RBI rate hikes

The Reserve Bank of India (RBI) has gone on a rate hiking spree starting from May this year to tame inflation by curbing demand. With the recent September increase of 50 basis points, we now have witnessed a hike of 190 basis points over the past few months.

Here is how you can make the most of the current higher interest rate environment by tweaking your investment portfolios.

Gilt and SDL bonds, TMFs

After a lull, the yields on government securities are on the rise again. In fact, the yield on the benchmark 10-year g-sec has risen almost 30 basis points in the last month and is nudging 7.46 per cent.

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As interest rates increase, chances are yields would also move up a tad more before stabilising.

For many other g-secs that mature 10-14 years down the line (for example, 07.54 GS 2036; 06.67 GS 2035; 07.05 GS 2032), the yields are already higher at 7.50-7.53 per cent, according to data from CCIL (RBI NDS – Order Matching).

There are also State government bonds (SDLs – State Development Loans) that are available at even higher yields for relatively shorter tenures (6-8 years). The 7.65% TAMILNADU SDL 2027, 7.2% MAHARASHTRA SDL 2027, 7.25% GUJARAT SDL 2027, 7.86% MAHARASHTRA SDL 2030 and 8.52% KARNATAKA SDL 2028 bonds are available at yields of 7.5-7.77 per cent. In the above bonds, the figure before the respective State/GS is the coupon on the bond. The format represents coupon, name of the State and bond, and the year of maturity.

In both cases there are almost no credit risks. And the yields are attractive over these periods compared to other safer options in the market.

But remember, you must buy these g-secs and SDLs at the current prevailing prices and hold till maturity and not sell before maturity to gain the full yield.

As these bonds pay out interest at regular frequencies, senior citizens can also create a pension stream by investing in these bonds. However, for direct investment in bonds, interest is taxed at slab rates.

Those not comfortable dabbling in the bond market directly can do so via target maturity funds (TMFs) that invest in gilts and SDLs. These funds invest in bonds of State and Central governments that mature in a specific year. Therefore, without complications, you can lock into yields of 7.5 per cent or higher currently, by holding these funds till maturity and pay minimal capital gains tax as result of indexation. Bharat Bond ETFs are another option. The Bharat Bond ETF maturing in April 2025 trades at a yield of 7.43 per cent, while the one maturing in April 2030 carries a yield of 7.65 per cent.

Existing index debt funds from the Edelweiss stable which invest in a combination of Gilts and SDLs maturing in 2026 and 2027 carry a yield of 7.51 per cent. Other existing gilt and SDL funds too offer over 7 per cent yields currently. For example, IDFC, has an existing gilt fund maturing in 2027, with a portfolio yield to maturity of 7.4 per cent currently. Gilt and SDL TMF NFOs, plenty of which are open currently, are also likely to offer attractive yields of around 7.5 per cent TMFs are predominantly available for 4-8 years period and some, for longer timeframes of 10-15 years as well.

Investors can use TMFsfor goals that coincide with those timelines.

Special tenure and SFB FDs

The quick succession of rate hikes has finally ushered in much-needed increases in deposit interest rates. There may be a bit more of a hike in the coming weeks or even months. Therefore, it would not be advisable for investors to lock into longer term deposits. At the most, a three-year FD can be considered if the rates are attractive. Here are a few options that investors may consider.

-         Canara Bank offers 7 per cent on its 666-day deposit. Senior citizens would get 7.5 per cent.

-        AAA rated Bajaj Finance gives attractive rates on certain tenures. For deposits of 22 months, it gives 7.05 per cent, 24 -35 months, 7.25 per cent and for 30 and 33 month tenures, it is 7.35 per cent. . All these rates are for cumulative and annual interest rate options. Senior citizens get 25 basis points extra across tenors.

-         Ujjivan, Suryoday and Fincare small finance banks offer 7.49-7.5 per cent on deposits of 2-3 years

-         SCSS for the elderly is another attractive option with rates increased to 7.6 per cent currently.

Investors can consider a combination of the above options according to their goals and timelines or even to take opportunistic benefit while ensuring safety.

Higher EMIs

From the heydays of sub-7 per cent home loans in 2020 and 2021, successive hikes in rates have made home loans expensive again. Home loan rates have risen 150-200 basis points over the past 5-6 months. Among the largest lenders such as SBI, HDFC, ICICI Bank and Bank of Baroda, home loan rates start at 8.4-8.6 per cent and go all the way up to 9.9 per cent. Let’s say, you enjoyed 7 per cent rate for one year and now face 8.6 per cent interest on your home loan of ₹75 lakh for 20 years. Here’s how your loan tenor or EMI would be altered.

-         At 7 per cent, you would have started with an EMI of ₹58,147 for one year

-         Once your interest rate increases to 8.6 per cent, your new EMI would be ₹65,386 for the remaining 19 years — that is, if you wish to keep the loan tenor of 20 years unchanged. So, you will have to pay ₹7,000 more every month.

-         If you wish to keep your EMI the same, your total loan tenure would increase to 268 months (from the original 240 months), which means the equivalent of 28 extra EMIs.

A higher EMI could eat into your other investments, affecting goals and timelines. On the other hand, if you increase the tenure, your interest outgo and total outflow balloon. In any case, you must not allow EMIs to exceed 40-50 per cent of your overall income.

A middle path could be to temporarily accept an increase in tenor, while paying more than the required EMI at regular intervals. Your bonus amount or any other windfall gains could be used to make extra payments so that you end up with the original tenor.

Those taking joint loans with their working spouse must opt for the higher new EMI and focus on prepaying early. They must seek to tweak their family budget and discretionary expenses accordingly.

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