Fixed deposit investment strategy in view of pause in rate hikes



The Reserve Bank of India (RBI) maintained status quo on policy rates today, which should provide some relief to the existing borrowers who have witnessed a steep increase in their interest cost over the past one year.

While existing borrowers having floating rate loans linked to external benchmarks would not witness any increase in their interest rates, borrowers having floating rate loans linked to MCLR and other benchmarks may witness change in their loan rates depending on the changes in their MCLR/internal benchmarks and the rate reset dates of their loans.

What Should Borrowers Do Now?

Keeping the pause in rate hikes, what should borrowers do now?

Naveen Kukreja, Co-Founder & CEO, Paisabazaar, said, “Existing floating rate borrowers having adequate surpluses should opt for prepayment to reduce their overall interest cost. They should preferably opt for the tenure reduction option to generate higher savings in interest cost.”

Existing borrowers who have witnessed significant improvements in their credit profile can exercise balance transfer to reduce their interest cost. “Their improved credit profile may make them eligible to transfer their existing loans to other lenders at much lower interest rates,” Kukreja added.

Also Read: RBI keeps repo rate unchanged: How this will impact homebuyers

Impact of Pause in Rate Hikes on FDs

The pause in the repo rate hike coupled with surplus liquidity in the banking system may lead bigger banks with adequate deposit mobilization to halt their fixed deposit (FD) rate hikes.

“Thus, depositors can start booking FDs for longer tenures, especially if those are offered at attractive yields. However, banks having more aggressive targets for their credit growth or those having relatively smaller deposit bases may resort to further FD rate hikes to achieve their targeted credit growth,” said Kukreja.

RBI lowered inflation target by 0.1% – and for now has anchored the repo rate at 6.5%. This means FD and small savings schemes might not see further upside in rotating shorter maturities.

“Some time ago it made sense to keep FDs in auto-renew for 30-day tenure to take advantage of rising rates, but now we might look at locking in these rates for a longer maturity. That said, we have a general election and elections are usually inflationary in nature. Hence, in the next 12 months when this plays out – we could see some upward revision if inflation surprises us on the upside,” said Abhishek Banerjee, Founder & CEO, Lotusdew Wealth and Investment Advisors.

The next state elections are around January 2024 – so till then it makes sense to lock FD rates. “I would call this an accommodative stance given that inflation is still above target RBI rates, but I believe they have more insights and perhaps expect inflation to cool further. If that’s the case, long-dated government bond mutual funds will also do well in such a scenario,” added Banerjee.


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