Time To Ladder Up Your FD Deposits

'Banks will continue to increase FD rates to attract more deposits and meet the increasing demand for credit.'

Contrary to the market's expectation of a 25-basis-point (bp) hike in the repo rate, the Reserve Bank of India on April 6, 2023 kept the benchmark rate unchanged at 6.5 per cent.

While RBI Governor Shaktikanta Das underscored the point that this doesn't necessarily signal the end of the rate hike cycle, the softening of bond yields showed the market believes otherwise.

"We think the rate cycle has peaked in India. It is likely that we are now in a period of long pause, unless there are near-term surprises to inflation," says Suyash Choudhary, head of fixed income, Bandhan Mutual Fund.

Joydeep Sen, corporate trainer (debt markets) and author, too believes that the rate hike in February may have been the last in this cycle.

"Inflation is likely to be softer in the near future due to the base effect. The probability of further rate hikes is low," he says.

Arnav Pandya, founder, Moneyeduschool, says the risks to this scenario could emanate from a spike in crude oil prices (as has happened recently), sticky core inflation, and a poor monsoon exacerbating food inflation.

Rate cuts, however, are not immediately on the horizon.

Fixed deposits: Don't try to predict the peak

Bank fixed deposit rates could inch up further, though not dramatically.

These rates have increased by a lower amount than the 250 bps rise in the repo rate.

System liquidity is now neutral and not in surplus. Credit demand remains buoyant.

"As long as credit growth rate surpasses the growth rate in bank deposits, banks will continue to increase FD rates to attract more deposits and meet the increasing demand for credit," says Naveen Kukreja, co-founder and CEO, Paisabazaar.

Predicting the peak rate is difficult. "Here onward lock yourself into good opportunities whenever you find them," says Pandya.

Kukreja says: "Currently, many small finance banks and a few private sector banks are offering highest FD slab rates of 7.5 per cent per cent or above. Select your tenor based on your investment horizon and FD slab rates."

Ladder your FDs to ensure liquidity at regular intervals.

Debt MFs: Don't get aggressive

Choudhary suggests investing in high-quality debt mutual funds having moderate duration (three-five-year average maturity).

He warns against taking risk in the current macroeconomic environment to compensate for the recent change in tax rules of debt MFs.

Yield to maturity of debt MFs have improved owing to the rise in interest rates.

"With the probability of further rate hikes declining, investors are unlikely to suffer adverse mark-to-market impact. Returns from debt funds are likely to be in line with YTM minus the expense ratio of funds in the near future," says Sen.

Investors can choose from categories like liquid, ultra short duration, money market funds, banking and PSU, and corporate bond funds (based on their horizon) while avoiding excessive risk.

Some experts are not bullish on duration calls.

"The average spread between the repo rate and the 10-year G-Sec is 100 bps for the past 22 years. Currently the spread is at 70 bps. So the scope for a bond rally is limited even if the RBI cuts the repo rate," says Sen.

Home loans: Prepay or refinance

Borrowers reeling under the weight of high EMIs and long tenors breathed a sigh of relief after the pause.

Several banks have reduced their spread over the benchmark.

"The spread, which was 300 bps in 2019-20, has come down to 200 bps today," says Adhil Shetty, CEO, BankBazaar.

The decline in spreads, he adds, offers an opportunity for existing borrowers to refinance their loans at a lower rate.

Keep an eye out on your credit score as it's a prerequisite for refinancing your loan at an attractive rate.

Borrowers who are early in their loan tenor must plan prepayments.

"If you took a loan four-five years ago, the rise in interest rates would have caused your tenor to balloon. Take a good look at your finances, see where you can save, and plan prepayments," says Shetty.

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