Fixed deposits have conventionally been a very lucrative investment option for conservative investors looking for guaranteed returns. However, over the years, as market-linked investments took their place in the spotlight, FDs were not on the radar of many investors. Now, with repo rates having risen, the FD rates of all banks have also displayed an upward trend.
If you are keen on capitalising on increasing fixed deposit rates, this may be an ideal time to include FDs in your portfolio. Let’s take a closer look at how you can do this and optimise your investment returns.
The repo rate is the rate at which the Reserve Bank of India lends funds to commercial banks in the country. This rate is subject to change at the discretion of the central bank. Every quarter, the RBI holds a Monetary Policy Committee (MPC) meeting, and, depending on the state of the economy, the RBI may decide to hike, hold or reduce the repo rates.
If the repo rate is hiked, the FD rates of all banks also increase as a result. Similarly, if the RBI reduces the repo rate, the FD rates of all banks will also decrease. This is why it is important for FD investors to keep an eye on the repo rates and understand how they impact the interest rates on fixed deposits.
In FY 2022-23, the RBI hiked the repo rate several times. Here is a timeline of the recent repo rate revisions in India.
These recent hikes in the repo rate have naturally resulted in a rise in the FD rates of all banks in the country. As a result, fixed deposits are looking attractive for investors once more.
Financial experts suggest that the FD interest rates in the market may likely be at their peak now, since the RBI has kept the repo rates unchanged twice in a row. So, if you want to capitalise on rising FD interest rates, this may be a good time to include fixed deposits in your portfolio.
You can compare the FD rates of all banks to identify the FD scheme that offers the highest returns. Alternatively, you can also use the FD laddering method, where you invest in multiple FDs of different tenures, thus ensuring that the maturity dates are laddered.
Before you decide to invest in a fixed deposit, you must understand how to calculate FD interest. This will help you get more clarity about the interest that you will earn from your fixed deposit. Typically, FD interest can be simple interest (in the case of monthly payouts) or compound interest (in the case of a cumulative FD).
Simple interest is computed using the formula shown below.
Simple interest = (P x R x T) ÷ 100
Here, P is the principal amount, R is the rate of interest per annum and T is the tenor in years.
On the other hand, compound interest, which is essentially interest on interest, is computed as per the formula shown below.
Compound interest = P {(1 + i/100)t – 1}
Here, P is the principal amount, i is the rate of interest per period and t is the number of periods of compounding.
So, this sums up how to calculate FD interest and how you can capitalise on the peak FD rates in India. If you want to include fixed deposits in your portfolio, experts suggest that it may now be an ideal time to take this step, since the FD rates of all banks are higher than they were earlier. However, depending on how the Reserve Bank of India changes or pauses any changes to the repo rate in the coming quarters, you will find that the FD rates of all banks may remain the same or even drop in the future.
Ensure that you keep yourself updated about the latest developments in the RBI’s Monetary Policy Committee (MPC) meetings. This will help you get a better idea of where the repo rates as well as the FD rates of all banks are headed.
Disclaimer: This article is published in association with Bajaj Finserv and not created by TNM Editorial.