Fixed deposit rates are rising but don’t go overboard on them

Many lenders such as HDFC Bank, ICICI Bank, Kotak Mahindra Bank and Axis Bank have recently revised their FD rates. Data show that major scheduled commercial banks (SCBs) are offering high interest rates (up to 6%) on FDs of longer tenures. Small SCBs and small finance banks are offering interest rates of up to 7.5%. Senior citizens get an additional payout on their deposits in the range of 50-75 basis points. Meanwhile, the NSE benchmark Nifty50 has gained around 3% on a yearly basis, while the index is 8% in the red on a year-to-date basis.

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Yet, experts caution against an overdependence on FDs. “You invest in equities for a particular reason and for a particular time horizon. The only time you should move out of equities and start parking funds in FDs is when you are nearing your financial objective or goal. Further, taking out money from equities at this point when many investors are looking to participate more in equities here onwards may not be a prudent strategy,” said Harshad Chetanwala, a Sebi-registered investment adviser and co-founder of MyWealthGrowth.

It must be noted that bank FDs are not a great investment avenue as their returns after inflation and tax tend to be negative. However, these instruments are good for parking emergency or surplus funds.

Experts believe that even if interest rates on bank deposits have risen in the recent past, banks would not be in a rush to increase rates further. “The repo rate will rise, but the banks will increase rates depending on their liquidity requirements. Unless the credit pace picks up, banks will not rush to increase interest rates on FDs. Right now, it may be better to look at short-duration fixed deposits of six-nine months,” said Chetanwala.

Further, financial advisors warn against going for weaker banks that tend to offer higher interest rates on the deposits.

“Go for a good quality bank where the asset quality is much better and bad assets are less. Stick with the top banks. Don’t opt for weaker cooperative banks and NBFCs where you are getting higher returns,” said Rushabh Desai, founder of Rupee With Rushabh Investment Services.

Investors should also note that while interest rates have gone up, the yields have gone up more on the longer end of the tenure—those of five years and above “The shorter end has definitely spiked up, but not as much as the longer end of the yield curve spike. So, we are going to see aggressive rate hikes, at least till early 2023,” said Desai.

The expert says investors should stick to the shorter end of the yield curve, and once the interest rate cycle has peaked out, move to a three- or five-year FDs.

In terms of taxation, interest earned on FDs is added to ‘income from other sources’, and one has to pay tax on it as per the slab rate. Further, if the interest on your FDs exceeds ₹10,000 in a financial year, banks deduct a TDS of 10% in case you have provided PAN details.

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