Your Money: Finding the best bank FD returns

DEPOSIT RATES HAVE risen steadily since May 2022. Data from the Reserve Bank of India show that the weighted average interest rates on new fixed deposits went up 23 basis points in March to 6.48%. This rate had increased in 17 of the preceding 18 months. But cost inflation is now also settling within RBI’s tolerance band. So these interest rates may not have a lot of headroom left. Naturally the question arises: what’s the best deposit rate you can lock in to, where, and for how long?

Where the rates are today

BankBazaar scanned deposit rates across 12 government, 21 private, 12 small finance, 13 foreign, and 10 of the largest urban cooperative banks. Of these, 71 are now paying depositors 7% or more on retail domestic deposits on select tenors. For senior citizens, 66 are offering 7.5% or more, and 29 are offering 8% or more. All government banks are now paying 7.35% or less, while two private banks have nudged up to 8%. All small finance banks but one are at 8% or higher, with two offering 9% or more. Six of them offer 9% or more to senior citizens. Most of these peak rates are on the 1-3-year tenors.

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What’s the ideal tenor?

This would depend on when you need your funds. The history of deposit rates over the last decade tells us we’re not likely to get much better than 7-8% — especially if inflation remains mild. If so, it makes sense to lock in to the longest available tenors at peak rates. Also, at peak rates there’s less need for laddering for better average rates and liquidity at various intervals. The solution staring at depositors in this scenario is to have one FD at the highest rate, ensuring better returns for longer. This FD can always be part-liquidated when required.

Should you move banks?

You could always move to another bank offering you higher returns. But most banks need you to open a savings account with them before you can make an FD. Therefore, the new bank’s minimum balance will need you to block some cash in low-returns savings which will offset the higher returns you expected from the FD. Not to mention, another bank account means paying its various charges and keeping track of your statements. Your best bets may be wherever you’re already banking.

What’s safe?

Small finance banks are offering some very attractive rates today. But depositors often ask if it’s safe to bank there. If they perceive risks there, they can work around the Rs 5 lakh deposit insurance limit by the DICGC, an RBI subsidiary.

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While picking a bank for your FD, keep in mind that quarterly compounding is better than half-yearly or annual compounding for marginally padding up your returns. Lastly, being able to manage your FD via the app or netbanking is useful, and banks that allow you to digitally open, close, or part-liquidate the FD are attractive to young depositors.

The writer is CEO, BankBazaar.com