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Understanding low FD interest rate regime, and how should you invest now?

The 115-basis points repo rate cut in back-to-back announcements by RBI, resulted in a significant fall in the interest rate in the economy. This brought down interest rates for fixed deposit, savings accounts, and government schemes.

The double digital interest rates that investors enjoyed a decade ago, now look like a pipe dream in the near future.

Understanding low FD interest rate regime, and how should you invest now?

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Banks and NBFCs have been reducing FD interest rates, and the interest rate trajectory only appears to be moving downward.

Why are FD interest rates being reduced?

Before we understand what steps to undertake, during this low FD interest rate regime, it is important to understand what has led to this reduction in fixed deposit rates. Here are four influences that may have contributed towards this:
• Monetary policy by Reserve Bank of India
• Surplus liquidity in banks, resulting in downward pressure on deposit rates
• Increased rates of inflation
• Slowdown in credit offtake for banks, resulting in slashed deposit rates

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If we look at our current situation, the primary cause of reduction is the inundation of liquidity (money) in the banking system, and a slowdown of credit off-takes (demand for loans) post the lockdown. As per reports by the Reserve Bank of India, the year-on-year credit growth for banks has seen a decline from 11.7% to 6.4% in recent months. During the same time, the number of bank deposits grew at a substantial rate from 10.1% to 11.5%.

Another clear indication is the credit to deposit ratio, which is a proportion of how much a bank lends from the deposits it accumulates. The credit to deposit ratio trends have also seen a sharp decline from 76% in the 4th quarter of the financial year 2020 to 73.1% of the 1st quarter of the financial year 2021.

So how does this translate to lower fixed deposit interest rates? As a result of the reduction in the credit to deposit ratio, banks are earning less from lending; all the while, deposits accumulate as banks are inundated with customer deposits. This trend is primarily due to uncertainties in the markets and lower customer confidence amid the pandemic. The combination of lower interest rates received from loans disbursed, and the excess liquidity means that banks have zero incentive to offer higher interest rates on their fixed deposit schemes.

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Under the current economic climate, reverse repo rates are at a paltry 3.35%, which is the lowest in over two decades. As a result, banks are gaining lower interest rates on their money and are left with no choice but to lower outgoing interest on fixed deposit vehicles.

Should you wait to lock into higher FD rates?

Interest rate changes are hard to predict. But what is sure is that the current repo rate (3.35%) will not see any further cut in the future. From a financial analyst point of view, "the worst is behind us". If you are eager to invest in a fixed deposit instrument that offers better returns, there are several FD issuers who can offer attractive returns.

For instance, Bajaj Finance online FD is a great option with interest rates as high as 6.85%. Take a look at the table below for a comprehensive analysis of the interest offered by Bajaj Finance Fixed Deposit, for a 36-month tenure.

Fixed Deposit Type Investment Amount (Rs.) Interest % Interest Earned (Rs.) Maturity Amount (Rs.)
Senior Citizens 250,000 6.85% 54,975 3,04,975
Non-Senior Investing Online 250,000 6.70% 53,692 3,03,692
Non-Senior Investing Offline 250,000 6.60% 52,839 3,02,839

These rates are among the best you can expect to get, given that banks have cut interest rates across the board. What's more, you are assured returns at the completion of your tenure, so you should feel rest assured about your investment.

Bajaj Finance fixed deposit schemes are backed by the highest safety ratings, with an FAAA (stable) rating by CRISIL and MAAA (stable) rating by ICRA, which indicate highest safety, along with the lowest investment risk. You can also use the Bajaj Finance Fixed Deposit Calculator to determine returns on your deposit, even before you invest.

In the hindsight, if you are thinking of waiting out these turbulent times, you should consider the interest you will end up losing, as a result of not investing sooner. With gold mutual funds posting negative 3-month returns and fluctuating stock indices, the current economic climate may not bode well for market-linked instruments. Hence, investing in fixed-income instruments is the best solution that can enable you to put your money to better use.

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