Following the rise in repo rates by the Reserve Bank of India (RBI), banks have also announced an increase in the interest rates for fixed deposits in tune with the rise in the key benchmark rate. For example, Punjab National Bank increased the FD rate to 6.1 per cent up from 5.1 per cent over the period of last year on deposits of 1 year to 3 years. The largest public sector bank, State Bank of India (SBI) has hiked fixed deposit (FD) interest rates to 5.5 per cent from 5.3 per cent, a jump of 20 basis points. Similarly, in the private sector, Bandhan Bank has increased FD rates to 7 per cent up by 1.5 per cent on deposits of 1 year to 3 years. A basis point is one-hundredth of a percentage point.
The rise in interest rates has made FDs attractive given the rates remained low for a long time. Here is the list of banks offering the highest interest rate and how the rates have moved up over the last one year:
The question, however, remains whether the increase in FD rates is high enough to absorb the impact of high inflation. Should one invest in FDs now given the rise in rates? “Fixed deposit rates are going up. This makes them a lucrative saving instrument, especially when many see capital protection as a priority. The rates, however, are not likely to provide inflation-beating returns. FDs are best to build your emergency fund or save for near-term financial goals that need liquidity. To improve your returns, you can consider laddering your FDs, where you create an investment loop by spreading your funds in different FD tenures. Once an FD matures, it can be reinvested for higher returns or put to its intended use," says Adhil Shetty, CEO, BankBazaar.com.
The retail inflation tracked by consumer price-based (CPI) inflation eased to 6.71 per cent in July, from 7.01 per cent in June on the back of easing food and oil prices.
As interest rate peaks one can also consider investing in debt funds for the short to medium term. Debt Funds invest in fixed income instruments like government and corporate bonds, and debentures among other things.