How Did Bank Deposit Rates Move Over The Years? Is It Time To Book Long-Term FDs?

Fixed deposits (FDs) are popular investment instruments among senior citizens as they provide guaranteed returns. Also, banks offer an additional 0.50 per cent interest rate to seniors over the rest, making them an attractive investment tool for older adults to ensure cash flows. Data shows that FD rates have been increasing due to factors like the Reserve Bank of India's (RBI) repo rate hikes, which affect both the deposit and lending rates of the banks, inflationary pressure, economic outlook, etc. However, after seeing a rapid upward spike in repo rates, done to tame inflation after the Covid-19 pandemic in 2020, they have stabilised at 6.5 per cent in the last couple of quarters. Currently, the scheduled commercial banks (SCBs) offer around 7-8.5 per cent interest to senior citizens, while the small finance banks (SFBs) offer up to 9.50 per cent interest. A recent report by Indus Equity Advisors shows that deposit rates dropped from around 8.5 per cent to around 5 per cent between 2015 and mid-2022 before rising again from the second half of 2022, which continues until now. From 2022, it said, the trend reversed, with the interest rates increasing close to 7 per cent now. The weighted average domestic term deposit rates in SCBs were 5.92 per cent in July 2020, but as of July 2024, it stands at 6.92 per cent. Also Read: Time To Kickstart Or Revisit Your Financial Planning Is Now

Will This Interest Rate Trend Continue?

Despite higher interest rates in bank deposits, household savings have been moving to equities lately. If this trend continues, bank deposits will become more and more unpopular, leading to liquidity issues. To stop this trend, the union finance minister and the RBI governor have advised banks to develop innovative products to attract household savings once again. Says Preeti Zende, a Securities and Exchange Board of India (Sebi)-registered investment advisor (RIA): “For a couple of years, we have witnessed good FD interest rates as RBI had a constant view on interest rates in their monetary policies for cooling the inflation and money supply in the market. However, the prolonged higher interest rates are also detrimental to the country's economic growth as capital is costlier, and companies cannot expand their businesses. Now we can see that due to RBI’s policies, inflation is somewhat controlled in India.” Also Read: Senior Citizen Savings Scheme Vs Senior Citizen FD: Which Is Better For Seniors?

Is It A Good Time To Book Long-Term FDs?

Experts believe the rates may go down from here. So, one can explore an FD before the rates drop. However, one should not invest in FD only because of the expectations for a rate cut. Instead, it should be based on their investment goal. Also, they look for banks that offer the highest rates for long-term FDs, like 10 years. According to Zende, “FD tenure should be according to your financial goal tenure. If your financial goal is 2/3 years, you can lock the required amount in a fixed deposit. Don’t wait any longer.” For senior citizens, she advises saving in a senior citizen savings scheme (SCSS) rather than bank FDs, as the SCSS scheme currently offers 8.2 per cent, higher than most SCBs offer. She also advises them to have exposure to hybrid, balanced, or index mutual funds in their portfolios. One should also consider taxation before investing in an FD scheme.