5 min readMay 23, 2022 05:47 PM IST
First published on: May 23, 2022 at 05:44 PM IST
The Reserve Bank of India (RBI) earlier this month raised the repo rate by 40 basis points to 4.4 per cent and also increased the cash reserve ratio (CRR) by half a percentage point to 4.5 per cent, effective immediately. The move made the borrowing costlier.
On the other hand, the interest rates on deposits, which have been continuously falling over the last several years, have seen a rise of 25-50 basis points. In other words, now customers will get more interest on their deposits. Interest rates depend on factors such as the deposit tenor, whether the bank is private or public, or small or large. Senior and very senior citizens get 50 basis points to 100 basis points more than general citizens on their deposits.
Before the interest rate hike, the average FD rate was 5.25 per cent per annum, which now stands revised to 5.75 per cent for general citizens. Going by the previous rate, on a fixed deposit of Rs 1 lakh, customers got Rs 1,05,354 as maturity sum for one year tenure. With extra 50 bps, the maturity sum after a year on a similar deposit will be Rs 1,05,875. This translates into an additional return of Rs 521.
Similarly, the deposit worth Rs 1 lakh would have turned into Rs 1,29,796 over a five-year tenure in the previous interest rate regime. With extra 50 bps as a return, the maturity amount, after five years, will stand at Rs 1,33,036 — fetching you an additional interest income of Rs 3,240.
Have Bank Deposits Turned Attractive Post Interest Rate Hike?
In nominal terms, interest returns have gone up. In real terms, the returns are negative.
Given the current inflation rate of 6.5 per cent and the possibility of it spiking further, the returns made from fixed deposits stand dwarfed. Assume that with the inflation at 6.5 per cent, your fixed deposit at 5.75 per cent. This means gross, negative real returns of 0.75 per cent. When you apply taxes as per your slab, your net real returns are worse.
As long as inflation-adjusted returns are negative, deposits can’t be attractive as they corrode wealth over time. The situation may improve once inflation returns in the comfort zone of 4-6 per cent, which looks difficult in the short term.
Who Should Consider Bank Deposits As Investments In The Current Scenario?
Conservative Investors
Investors who want to conserve their cash balance in absolute terms may consider bank deposits. They will, however, have to deal with wealth erosion if their real returns are negative.
Investors Who Need Money In Short To Mid-Term
Those customers who would require funds in the foreseen future or those who want an emergency fund may consider parking their money in bank deposits. Given the uncertainty in the equity market, it would be wise to park your emergency corpus in banks’ deposits to ensure your funds’ utmost safety.
Senior Citizens
Senior citizens, who generally have the least or no risk appetite, should consider investing in bank deposits. Since they are eligible to get higher interest rates, the returns are almost at par with inflation. It would be like a no gain, no loss situation for them.
Who Should Avoid Bank Deposits?
Growth Oriented Investors
Customers who chase returns and want growth in their investments over time with a relatively highrisk appetite may not find bank deposits as suitable investment avenues. They may consider equity-oriented investments in their portfolios.
Long-term investors
Investors with a long-term approach to investments to fulfill their various financial goals with a tenure of more than 3-5 years may consider giving a pass to bank deposits. Since their investment horizon is quite long, stretching up to 20 years or more, irrespective of their risk appetite, bank deposits may not help them. They may eschew investments in bank deposits.
What Should Be Your FD Strategy?
If you want to invest in fixed deposits, there are various strategies that you can adopt to maximise your returns. You may consider going for a short-term FD till the interest rates increase. Once the rates rise, you can switch to FDs offering higher interest rates. Another ideal way to maximise returns is through the method of laddering. It enables you to spread your deposits in different tenures and interest rates. This will help you earn more interest, and your money will also not get stuck in a single rate deposit. You can reinvest them with FDs offering higher interest rates whenever your deposits mature. Small finance banks offer higher interest rates than public and private sector banks. You can consider parking part of your funds in FDs of small finance banks. But before doing so, understand the risks involved to make a wise decision. You can also consider investing in company FDs with AAA ratings and offer higher return rates.
The author is the CEO of BankBazaar.com. Views expressed are that of the author.
Before the interest rate hike, the average FD rate was 5.25 per cent per annum, which now stands revised to 5.75 per cent for general citizens. (Representative image: Pixabay) 
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