NEW DELHI: After staying below 6% for over two years, bank fixed deposit rates have begun to go up, albeit at a much slower pace than the lending rates. Nonetheless, fixed depositors have something to cheer about, as some banks have started offering as high as 7.75% interest in certain special FD schemes. Many banks have announced special tenor FD schemes – with tenure ranging from 600 days to 777 days.
Bandhan Bank is offering 7.5% on a 600-day FD for retail investors with deposit amount up to R2 crore. Senior citizens can get 8% under the same scheme. State-owned Bank of India has launched ‘Star Super Triple Seven Fixed Deposit’ scheme, under which it is offering 7.25% on a 777-day FD. Senior citizens can get 50 basis points more, or 7.75%, under the same scheme. This is a limited-time offer.
Similarly, Bank of Baroda recently launched the Baroda Tiranga Deposit scheme offering up to 6.85% interest on 444- and 555-day FDs. The Reserve Bank of India (RBI) has increased the benchmark repo rates by 190 basis points since May this year. While banks have fully passed on the impact of repo rate hike to borrowers, they have been slow in passing on the benefit to depositors.
However, in the last couple of months banks have witnessed a sudden surge in credit offtake -- loan portfolios of banks of late grew at 15-20%, while deposit growth has remained around 9-10% for a few quarters. Foreseeing a tighter liquidity situation, banks have been forced to increase fixed deposits rates. Though banks have been raising interest on FDs, the increase has been limited to certain special tenure rather than across the board. In many cases, FDs with regular tenure are still fetching 5.6-6.1% interest.
Special rates: What’s the catch?
Should you go in for the special tenure FDs and lock in money in these high-interest rate deposit schemes? Jitendra Solanki, a SEBI-registered investment expert, says if the interest rate is above 7% then risk-averse investors can look for these options.
Rishiraj Maheshwari, founder and CEO of RISCH Wealth & RISCH Family Office, says it makes better sense to get locked in for a longer tenure FD that is offering 8-9% interest. With inflation finally cooling down, not just in India but in other countries as well, the pace of rate hikes by central banks would slow down. So, banks may not stop increasing the FD rates in future. So, if one can park their money in long tenure FDs offering 8-9% interest, it could be a good deal for the depositor.
Maheshwari says that with inflation cooling off, one should not take reinvestment risk in FDs with shorter tenure. Most of the special schemes launched by the banks have tenure less than three years.
A reinvestment risk means a matured fixed deposit is reinvested in an FD that offers lower interest.
There are other limitations of these special FD schemes, and depositors must know the terms and conditions before committing their funds to such schemes.
For example, BoB Tiranga Deposit scheme offers callable and non-callable options. Under callable options, one can withdraw the money before the end of the tenure, while under non-callable schemes, there is no option of premature withdrawal.
Also, FDs with pre-mature options are offering lower interest than those with no premature withdrawal options. Some of these schemes are only available for a limited period, while others have a cap on the total investment amount.
Alternative to bank FDs
If one looks for an alternative avenue, then debt mutual funds could be an ideal option for a risk-averse investor. According to Jitendra Solanki, average five years return for debt MFs have been around 7%, and they come with indexation benefits, that make them more tax efficient than the FDs.
While interest earned on FDs is added to one’s income and taxed as per the respective tax slab, capital gains from debt mutual funds are taxed according to an investor’s tax slab for a period up to three years. Gains made from investing in over three-year period are taxed at 20% after indexation.
Corporate FDs can also be an alternative to bank FDs. Usually, corporate FDs or NCDs offer 100-200 basis points higher rates than bank FDs. However, depositors must be aware of the risks associated with corporate FDs. They have higher default risk than bank FDs, therefore, depositors must invest only in high rated corporate FDs.
FDs regain shine
Bandhan Bank offers 7.5% on a 600-day FD for retail investors
Bank of India’s ‘Star Super Triple Seven Fixed Deposit’ scheme offers 7.25% on a 777-day FD
Baroda Tiranga Deposit scheme offers up to 6.85% interest on 444- and 555-day FDs
Debt mutual funds could be an ideal option for a risk-averse investor
Corporate FDs or NCDs offer 100-200 basis points higher rates than bank FDs