Things FD investors can do now the Repo Rate is unchanged
In India, fixed deposits are the holy grail of investments. For generations, investors have been locking their money in fixed deposits because it is considered a safe form of investment and gives assured returns. However, fixed deposit interest rates are at multi-year lows.
That is because the Reserve Bank of India slashed the Repo rates during the pandemic and has kept it unchanged since May 2020. It has directly impacted the rate at which banks offer return on investment on FDs.
What is Repo Rate, and how does it affect FD investors?
Repo rate is the rate at which the RBI lends to commercial banks. RBI repo rate directly impacts the rates banks lend to customers and the interest they provide on deposits they take from customers, i.e. bank fixed deposits.
Since May 2020, the RBI has kept the repo rate unchanged at 4%. Banks have also reduced the rate at which they lend and provide interest to FD investors. While borrowing has become cheaper, it also has impacted the return on investment for investors.
If you are an FD investor and have been impacted by the low-interest rates because of no RBI repo rate change, we tell you some things you can do to improve your returns.
Additional Read: A Beginner’s Guide to Monetary Policy Tools
4 things FD investors can do to enhance their income from Bank Deposits
1. Go for short-term FDs
According to historical data, banks and financial institutions first increase their interest rates on short-term and medium-term deposits. For instance, in the recent past, some banks have hiked the interest rates on fixed deposits of 7-29 days, 30-90 days, 91 days – 6 months and six months to less than a year first while keeping long-term interest rates intact. To get more on your buck, consider investing in short-term FDs instead of locking your money in for the long term.
2. Avoid long-term renewal of FDs
As mentioned in the point above, stick to a short-term FD strategy in low interest regime. When a deposit matures, instead of locking it in for the long term, renew it for a shorter period. This way, when the rates change, you can take advantage of the revised interest rates by renewing your FD at a higher rate of return.
3. Make use of the ladder strategy
Using the FD ladder strategy is another way to make a better return on investment on your FDs. The FD ladder strategy involves dividing a big fixed deposit amount into multiple ones with different tenures. For instance, if you have an amount of Rs. 3,00,000 for fixed deposit, instead of putting it together in one FD for, say, five years, you could break up to put Rs. 1,00,000 in a 6-month FD, Rs. 1,00,000 in a 1-year FD, Rs. 50,000 in a 2-year FD and another Rs. 50,000 in a 5-year FD. This way, you can get higher average returns on your FDs and also renew them at better interest rates when the interest rates rise.
4. Consider NBFC or Corporate Deposits
Non-banking financial institutions provide higher interest rates on deposits than public and private banks. That is because they are slightly riskier than bank deposits. If you do not mind taking on a little additional risk for higher returns, then you could consider putting some of your money in NBFC fixed deposits instead.
Additional read: All you need to know about Corporate fixed deposits
The current RBI repo rate is unlikely to reduce further, but no one can predict the future. You need a smarter investment strategy to increase the rate of return on your investments. Follow the above tips to make the most of your fixed deposit investments.
Additional Read: How to Use Fixed Deposits to Get a Car Loan?
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