If you were looking for positive answers to your questions like when will FD interest rates increase in India, then good times are here for you now.
After RBI made it clear that the interest rate cycle has turned, the banks and other NBFCs have already started increasing FD rates, though very slowly. But given the current expected trajectory of RBI’s policy rates, FD rates are all set to increase higher in 2022 and 2023 in my view.
Will FD rates reach 7% Soon?
Probably yes. Very soon, at least for some tenures if not for all. Though it is difficult to predict how high these rates will eventually go, chances of reaching 7% soon are pretty good. Though few small finance banks already offer higher rates, I am talking here about the larger PSU and private banks where most people feel comfortable parking their fixed deposits
Related Reading – Safe banks for fixed deposits in India
Will FD rates reach 8% Later?
This is not going to happen in 2022. And to be honest, no one knows how high FD rates will go in future. But chances of 8% in a few quarters’ time cannot be ruled out. It might not touch 8% but still might get close to it nevertheless in the new future or in 2023.
Just speculating about certain FD tenure rates rising to 8% in the next 1-2 years and hence, no guarantees here. I remember that the last time we had 8% FD rates was almost a decade back.
What Should Be Your Fixed Deposit Strategy Now?
If you are considering putting money in FDs or already have some money parked in fixed deposits, then you need to be a bit smart about handling the changing interest rate scenario.
For the time being, stick to shorter-term FDs (6-12 months max) to gain from the rising-rate scenario. Interest rates won’t rise in one go. So in the current scenario where FD rates will see a gradual upward revision, there is no point in locking your FDs for a long tenure. You can wait a bit (i.e. stay in 6-12 months FD) and then, renew for a longer duration when rates are nearing their peak.
Going for the FD laddering is also a strategy if you don’t want to keep waiting. Suppose you have Rs 50 lakh for fixed deposits. Break it into 5 parts of Rs 10 lakh each. Make FDs of different (but increasing) tenures like one for 4, 6, 9, 12, and 15 months. The idea is that as interest rates increase in near future, you will have a chunk of money getting available for renewal at higher rates (if not the full amount at highest FD rates in India)
Nowadays, there is a new option for FD investors where they get a floating interest rate on their FDs. I have also written about this flexible FD in detail here – whether floating rate FD is a good investment option for depositors or not.
Also, avoid going for an auto-renewal facility on your FDs so that you have the freedom at hand to decide the best tenure and interest rate later.
If you use fixed deposits to park your Emergency Fund or to set aside money for near-term expenses, then the above strategy should serve you well when parking money in bank deposits.
But remember that FD interest income is taxed at your tax slab rates and hence, may not still beat inflation. If you are even a moderately aggressive investor, then consider debt funds as a viable option for better post-tax returns. Debt fund returns are not fixed or guaranteed but if you remain invested for long, then indexation benefits of debt fund help generate better post-tax returns than FDs.
So if you understand debt funds and how these work, then debt funds can be a good alternative to fixed deposits in India.
Also, equity funds should be generously invested in for your long term goals. That is the only way to beat inflation.
FD rates have been quite low for a very long time now. Those who depend on it have not had a very good return experience for the last several years. But things are turning now. FD rates are set to increase in 2022 and 2023 in India.
A really helpful article. Although I believe these instead of investing in FD it makes more sense to invest in mutual funds which will provide high returns.