Why fixed depositors investors can expect higher interest rates ahead and what they should do now
This might change in 2021 as interest rates on fixed deposits might begin inching up. Here is why.
Year 2021, deposit rates are set to go up by the second half
In 2020, the Reserve Bank of India’s (RBI) measures had been focused to maintain the coverage rates down all year long, extending into 2021. It additionally introduced measures to infuse liquidity within the banking system to have the ability to present reasonably priced financing and therefore, assist financial development. Extra liquidity additionally stored interest rates down. On the opposite facet, financial institution credit score offtake was low, as banks adopted a cautious stance in the direction of lending throughout all sectors of the economic system. Low credit score offtake meant decrease demand for funds by banks/lenders and therefore, decrease fee of interest on deposits.
RBI Repo Rate since October 2019
| Date of replace | Repo Rate |
| 04th Oct 19 | 5.15% |
| 05th Dec 19 | 5.15% |
| 06th Feb 20 | 5.15% |
| twenty seventh Mar 20 | 4.40% |
| twenty second May 20 | 4.00% |
| 06th Aug 20 | 4.00% |
| 09th Oct 20 | 4.00% |
| 04th Dec 20 | 4.00% |
| 05th Feb 21 | 4.00% |
Source: MyLoanCare.in
However, revenue prospects look higher with anticipated financial development pegged at 10.5% by RBI for FY21-22. The similar may additionally replicate within the fee of return on fixed deposits. Even although the RBI has introduced continuation of accommodative stance on rates and liquidity which might imply no rapid improve in interest rates, but there are a couple of components as a consequence of which deposit rates might inch up over the following 3-9 months.
- Credit off-take is anticipated to be sturdy within the coming monetary yr, which might imply a higher demand for deposit funds and therefore, a higher fee of interest. This is anticipated to be pushed by funding demand from infrastructure and actual property sectors in addition to launch of pent-up client demand, thus leading to excessive development in retail finance.
- Further, RBI is anticipated to stroll on a decent rope of managing inflation inside its goal vary of 4-6% in addition to sustaining liquidity within the system. Easy liquidity coverage is inflationary and any rise in inflation would imply the rates need to go up, each for credit score in addition to deposits.
- Contrary to its accommodative stance, RBI has already tapered down its liquidity assist to the market with no extra liquidity measures introduced within the newest financial coverage evaluate in February 2021 or in Budget FY21-22. In the February 2021 financial coverage evaluate, it has withdrawn the 1% CRR (Cash Reserve Ratio) leisure for banks and now the CRR should be introduced as much as 4% in two tranches. A hike in CRR will result in discount in liquidity accessible with banks which can drive them to look out for extra funds from retail depositors to fulfill their credit score demand , thus including one other issue that can end in higher deposit rates.
What it means for depositors
Some banks and non-banking finance firms have already began rising deposit rates throughout tenures, particularly rates on long term FDs. The desk beneath captures the FD fee hikes introduced by few well-known banks. Though the variety of such banks is few, it could go up as we see an interaction of varied macro-economic components over the following few months.
Examples of banks and NBFCs which have elevated their FD rates in final 3 months
| Bank/NBFC identify | Current Rates – General Public Rates, Sr. Citizen Rates | Date on which final revised | Change in FD rates |
| SBI | 2.90%-5.40%, 3.40%- 6.20% | 8th Jan, 2021 | Increased 1 yr FD fee by 10 bps |
| Canara Bank | 2.95% – 5.50%, 2.95% – 6.00% | 8th Feb, 2021 | Increased rates of FDs with tenure of two years or extra by 20 bps |
| Bajaj Finance | 6.15% – 7.00%, 6.40% – 7.25% | 1st Feb, 2021 | Increased FD rates by 40 bps for tenure of 36-60 months |
| ICICI Bank | 2.50% – 5.50%, 3.00% – 6.30% | 21st Oct, 2020 | Increased Senior Citizen FD rates by 80 bps |
Source: MyLoanCare.in
What should FD investors do
Global companies and consultants have already began questioning the power of RBI to proceed with its accommodative stance together with attempting to realize its macro-economic targets for inflation and fiscal deficit. All macro-economic indicators collectively level in the direction of an inevitable rise in deposit rates ranging from the second half of the FY 2021-22. Till then, depositors should hold their cash parked in shorter tenure FDs (i.e., tenures of lower than one yr) to retain the pliability to shift their financial savings to higher rates as soon as the rates start their upward journey.
(The creator is Chief Strategy Officer, MyLoanCare.in.)
