After a long spell of low interest rates, fixed deposits are gaining sheen following two consecutive repo rate hikes by the Reserve Bank of India (RBI) in May and June.

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Earlier this month, the RBI hiked the repo rate by 0.50 percent after its monetary policy meeting on June 8, taking the total hike to 0.9 percent in 36 days.

This bodes well with fixed deposit (FD) investors, who saw interest rates decline by 40 percent in six years from the highest interest rate of 9 percent offered by the State Bank of India (SBI) in September 2014 to 5.4 percent in May 2020, The Economic Times reported.

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Low fixed deposit interest rates had mostly impacted senior citizens who draw regular income from FDs.

With the RBI upping its policy rate, banks have started raising FD interest rates. Fixed deposits have always been popular among low-risk investors seeking assured returns.

However, investors should know certain facts before going for FDs.

Slow rise in rates

When the RBI tweaks policy rates, the lending rates go up first before FDs. Banks take some time to pass on the benefit of the rate hike to the depositors. This is also because banks have sufficient liquidity and are in no hurry to attract deposits.

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Apart from the slow transmission, investors should know that banks offer the highest hike in interest rate on long-term fixed deposits, which are mostly over three years. On the commonly-opted one- or two-year deposits, the rate hike is just 10-30 basis points in most cases.

“Sensing the rising interest rate cycle, secondary market yields have gone up significantly across tenures. Bank fixed deposits rates will take some time to go up,” moneycontrol quoted corporate trainer Joydeep Sen as saying.

Rates could touch 7%

Experts believe that the RBI could raise rates by 50-75 basis points further in the next 2-3 quarters after the 0.9 percent interest rate hike by the RBI in just 36 days. Another indicator for long-term interest rate is the 10-year G-sec yield, which is currently over 7 percent. Hence, even though the transmission of rate hike is slow, there is a possibility of bank FD rates crossing the 7 percent mark in the next 6-9 months.

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Therefore, it may not be the right time to invest in FDs for the long term or book a big FD for renewal. It is better to invest in fixed deposits with short tenor during a growing rate scenario so that the investor can reap the benefit from the hike later. Once the short-term investment matures, the investor can renew the FD for the longer term at a better rate.

FD laddering

Some experts advise making an FD ladder as that helps the investor break a big deposit into parts with different time maturities and earn average return even during volatility in interest rates.

Keeping cash while waiting for rate hikes means less earning for the time being, Mumbai-based certified financial planner Parul Maheshwari told moneycontrol.

“Instead, it makes sense to invest in a mix of one-, two- and three-year fixed deposits taking into account your cash flows needs,” Maheshwari said. When the deposits mature, the investor can redeploy the money at the prevailing interest rates.

However, experts say it is better to ladder or stay in short-term fixed deposits and avoid fixed deposits of five years or more.

(Edited by : Shoma Bhattacharjee)