REPO RATE UNCHANGED: Lock in bank FDs at highest rates

As the Reserve Bank of India’s (RBI) monetary policy committee has decided to keep the repo rate unchanged at 6.5% after cumulatively increasing the rate by 250 basis points since May 2022, investors should lock in bank fixed deposits (FDs) at higher interest rates and select the tenor based on their investment horizon. Borrowers should start prepaying the principal amount to reduce the loan burden.

Lock in to long-term bank FDs

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Interest rates of bank FDs have increased after the central bank increased the report rate. FD rates seem to be peaking in this cycle as most banks are currently offering more than 7% on select deposit tenors with a 25-75 bps premium to senior citizens. Moreover, some banks have also started to reduce their deposit rates. Banks are also launching special deposit schemes offering higher interest rates.

At the current deposit rates, individuals must lock in to the longest available tenors at peak rates. Existing depositors should continue with their FDs till their maturity irrespective of the changes in the repo rate. However, they should opt for premature FD closure and do a new FD only if they find a significant gap between the rates of the new and the existing FDs, after accounting for the premature withdrawal penalty.

Adhil Shetty, CEO, Bankbazaar. com, says the pause on the repo rate points towards a flattening of interest rates. Once this happens, banks may start cutting their deposit rates in line with the broad costs of borrowing. “If you are planning to invest in FDs, this should be a good time to lock into these peaking rates. This should help lower your reinvestment risk. When interest rates are high for FDs, it is sensible to opt for longer tenors whereas when interest rates are low, it makes sense to choose shorter tenors,” he says.

To earn returns, you can also move to another bank. However, most banks insist on opening a new savings account before you can make an FD and the new bank’s minimum balance will block some cash in low-returns savings which will offset the higher returns from the new FD.

Avoid laddering now

At peak rates, laddering deposits make little sense. Keep in mind that quarterly compounding is better than half-yearly or annual compounding. You can deposit money in special FDs launched by banks such as SBI and HDFC Bank. However, these schemes do not allow premature withdrawal facility and some banks may also set higher minimum deposit amounts for their special FD schemes. Also factor in your liquidity requirements and compare the interest rates offered by other banks, especially by small finance banks and other private sector banks, before booking special FD schemes.

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Prepay home loans

While the pause by RBI means that the EMIs will not go up immediately, borrowers, especially those with a long tenure home loan, should start repaying or increase their EMI or even look at balance transfer to reduce their interest burden. Banks and housing finance companies (HFCs) do not charge any prepayment penalty on floating rate home loans. However, some HFCs charge prepayment interest which is simple interest based on principal outstanding and the reference date of prepayment. To save on that, make the prepayment in the first week of the month. Do not wait for a long period to accumulate money to prepay. Instead, start prepaying after keeping adequate emergency funds.