Senior Citizen Fixed Deposit high interest rates may not be for long, says report

Following the Reserve Bank of India’s (RBI) monetary policy committee decision to keep the repo rate unchanged at 6.5 per cent, there has been a lot of buzz around bank fixed deposit rates. Experts feel that the interest rates may go down mainly due to increasing deposit growth in banks this year. 

According to a report by SBI Research, senior citizen fixed deposit schemes, which have seen some of the best rates in the last two years, may not see any more hikes anytime soon. FD interest in some banks has gone up over 9 per cent.  

As per the report, further deposit rate hikes may not be expected because of an increase in deposit growth in banks. 

“Overall deposit growth in FY2023-24 should grow over 11 per cent year-on-year (YoY). This will effectively imply that spate of deposit rate hikes could be a thing of the past,” the SBI Research stated as quoted by a Financial Express report. 

The SBI Research report has further said that bank deposits are likely to increase by Rs 2 lakh crore in the coming months. 

“Meanwhile, liquidity surplus in the system has again increased with the Net LAF absorption at Rs 2.2 lakh crore as on June 7 from an average of Rs 1.0 lakh crore in Apr-May’23. The government surplus cash balances have also started declining from the third week of May,” the report said. 

It further added: “Even the deposit of Rs 2,000 notes in banks has added to the liquidity. As we have earlier highlighted, around 85 per cent of the Rs 2,000 notes are deposited in bank accounts and not exchanged for smaller denominations. Thus, bank deposits are likely to increase by at least Rs 2 lakh crore assuming some of the notes would already be with banks in currency chests.” 

RBI Governor Shaktikanta Das on Thursday said as many as 50 per cent of the Rs 2000 notes in circulation have returned to the banks since the announcement of withdrawal in May. This would further enhance the liquidity in the bank.

FD rate hikes 

The rates of fixed deposit schemes were hiked significantly in 2022 after the central bank raised the repo rate by a total of 2.5 per cent in a bid to beat inflation.  

Since February 2023, the RBI has maintained its repo rate at 6.5 per cent. The rate pause, which is the second one in the last three months, has made experts and market watchers speculate a reversal in the interest rate hike cycle. 

In the last two years, most banks are offering attractive rates of 7 per cent and above on select deposit tenors. Small finance banks, such as Ujjivan, Suryoday Small Finance Bank, Unity Small Finance Bank, are presently offering rates around 8 per cent, and more.  

Senior citizens have benefitted immensely as they were offered a 25–75 basis points over the rates for the general customers.  

Besides, RBI’s withdrawal of the accommodation stance further solidifies the case that any rate hike in the near future is highly unlikely. Inflation’s trajectory will be the most significant factor that will determine the direction of interest rates. 

What should investors do now? 

Experts strongly believe that investors can gain the most by staying invested in existing bank fixed deposits for higher interest rates or freshly investing in FD schemes before rate cuts happen.  

"FD rates are not going to immediately fall but if we look at the current trends, sustaining such high interest rates for longer period of time looks difficult. FD rates seem to be already peaking in this cycle. Most banks are currently offering more than 7 per cent to depositors on select deposit tenors with a 25-75 bps premium to senior citizens. Whenever banks face liquidity challenges, the interest rates for deposits are likely to rise and when the liquidity challenges subside, fixed deposit rates may fall," said Adhil Shetty, CEO, Bankbazaar.com. 

He added: "If you are planning to invest in fixed deposits, this should be a good time to lock into these peaking rates. This should help lower your reinvestment risk. When interest rates are high for FDs, it is sensible to opt for longer tenors whereas when interest rates are low, it makes sense to choose shorter tenors. It is also a good idea to ladder your FDs to earn higher interest during volatility in the interest rate."

“If someone’s FD scheme is maturing at present, then I would suggest that he or she reinvest as the rate cuts may happen in the coming months. Locking your money in FD schemes now can benefit the investors in the future,” said D K Joshi, Chief Economist, CRISIL. 

Abhishek Banerjee, Founder & CEO of Lotusdew Wealth and Investment Advisors, told BT: “RBI lowered inflation target by 0.1 per cent, and for now has anchored the repo rate at 6.5 per cent. This means FD and small savings schemes might not see further upside in rotating shorter maturities… Investors might look at locking their money in these rates for a longer maturity with the general elections around the corner.” 

He further added: " Following 12 months, when this plays out we could see some upward revision if inflation surprises us on the upside.”

Also read: Punjab National Bank, Axis Bank reduce fixed deposit interest rates on select tenure. Check rates, tenure here

Also read: FD interest rates up to 7.75%: HDFC Bank launches new fixed deposit schemes. Check details