Bank of Baroda has launched a new “Utsav Deposit” scheme with a term period of 400 days, which the public sector lender has launched specially for the festive season. Under this FD, general public will be offered an interest rate of 7.3 per cent, while senior citizens will get 7.8 per cent. Super senior citizens (people aged 80 and above) will get 7.9 per cent interest.
Bank of India, too, has recently launched a special 400-day retail term deposit scheme at interest rates ranging from 7.3 per cent (general public) to 7.95 per cent (super senior citizen). In case one opts for non-callable deposit, which means there is no premature withdrawal available, the interest rates offered are higher―between 7.45 per cent to 8.1 per cent.
The country’s largest lender, State Bank of India, too, has a similar 400-day term deposit scheme called Amrit Kalash, and a 444-day term deposit scheme called Amrit Vrishti, offering higher interest rates. Many other banks, including Union Bank, have launched special term deposit schemes.
This rush by lenders to offer special fixed deposit schemes at attractive interest rates comes against the backdrop of bank deposits growing at a slower pace than credit growth. Over the last few years, people have increasingly turned to stock markets and mutual funds. More than Rs24,000 crore is coming to mutual funds per month via SIPs (systematic investment plans) alone. Finance Minister Nirmala Sitharaman had in August nudged state-owned banks to undertake special drives to mobilise deposits.
Clearly, there was a need for banks to make term deposits slightly more attractive and that is why we see these special offers. But, the question is, should individuals park their money in long-term deposits now, or wait?
One major thing to consider here is interest rates. Over the last couple of years, as inflation surged, major central banks hiked interest rates. But, the cycle seems to be turning. In September, the US Federal Reserve slashed its interest rate by an outsized 50 basis points. It is expected to slash rates by a similar level by December 2024 and then some more in 2025. The Chinese central bank and the European Central Bank, too, have slashed interest rates this year.
Back home, the Reserve Bank of India, in its latest monetary policy committee (MPC) meeting on October 9, left its benchmark repo rate unchanged at 6.5 per cent. However, it changed its stance to “neutral” from “withdrawal of accommodation”, clearly signalling that it could act in the future, should conditions turn conducive. “The RBI’s recent shift to a neutral stance signals a move towards anticipated rate cuts and a lower interest rate cycle, both in India and globally,” said Raghvendra Nath, managing director, Ladderup Wealth Management.
A lot depends on where inflation is headed. The CPI (consumer price index) inflation in July and August came in below RBI’s targeted 4 per cent. But, it has jumped to 5.49 per cent in September, on the back of rise in food prices. After the Reserve Bank changed its stance to neutral, the wider expectation was that it will start cutting interest rates from December. But food prices continue to pose a major risk to inflation. The continued geopolitical tensions in West Asia, too, remain a risk. The central bank will also be watchful of how the GDP growth pans out and any slowdown there could raise the chance of a rate cut, too.
Some economists still see the central bank making rate cuts in December, but don’t expect too many cuts, unlike in other, especially developed, economies. “There are chances of a shallow rate cut of 25 bps in the December policy, followed by another 25 bps in the February policy, provided food inflation moderates,” said Rajani Sinha, chief economist at CareEdge Ratings.
UBS’s chief India economist Tanvee Gupta Jain expects the RBI to lower the repo rate by 75 basis points during the easing cycle. “The timing of the rate cut cycle is tricky and we believe the MPC would remain data dependent. For policy easing to begin from December, either inflation will need to soften well below 5 per cent and/or growth to surprise on the downside,” said Jain.
As such interest rates are expected to come down over the next few quarters, with little to no chance of them going up. That brings us back to the original question. Should individuals lock in their money now in long-term fixed deposits?
“With banks offering higher interest rates on special FDs, savers could consider locking in long-term deposits to benefit from these rates before a potential rate cut cycle begins,” said Kirang Gandhi, a personal finance mentor. He expects the RBI’s benchmark rate at which it lends money to commercial banks to come down by 100 basis points (1 per cent) by December 2025, with growth slowdown becoming apparent. “However, balancing liquidity needs and exploring other investment options may offer better long-term growth opportunities,” Gandhi noted.
Equity markets have given far superior returns over the last two to three years. However, of late, there has been a lot of volatility. The BSE Sensex having touched a life high of 85,978.25 on September 27 has closed below 82,000 on October 15. Fixed deposits in contrast offer slow, but steady returns. Ultimately, you should assess your risk appetite before allocating your money, especially if its a large sum.
You may also want to explore debt mutual funds. Should interest rates start falling, debt funds would benefit, as typically when rates fall, the value of the existing bonds these funds are holding rises and vice-versa.
“For those willing to take on a bit more risk, investing in high-quality investment-grade bonds can be a good option, potentially generating returns that outpace inflation on a post-tax basis,” said Nath of Ladderup. “However, for risk-averse investors seeking a fixed return without any risk, locking in a high-rate fixed deposit would be the better choice.”