The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has decided to keep the key policy rates unchanged in the face of the Covid-19 pandemic and the considering uncertainty over the Omicron variant. There is a possibility of sharper firming of prices in near future due to supply constraints and several other factors, including limited compensations for farmers who have lost their crops.
For now, interest rates on FD will remain unchanged, especially when everyone is trying to recover from the devastating second wave and more than two years of pandemic. However, some would be disappointed as the central bank maintained the status quo regarding interest rates and held them at 4 per cent for over a year now. One such group would be investors who have put their money in fixed deposit accounts.
At the end of the day, investors are worried about their money as returns have not been consistent with inflation. Fixed deposits tend to be safer investments for people who don’t want to take risk. However, these days, fixed deposit rates have turned out to be low as a result of monetary policy measures taken by the government on account of subdued inflation levels and strong credit growth.
The RBI’s decision to keep the repo rate unchanged for now at 4 per cent and reverse repo at 3.55 per cent was in line with expectations. The panel has also retained its accommodative stance for as long as necessary to revive and sustain growth in the economy on a durable basis while reducing the impact of Covid-19 pandemic and subsequent lockdowns, while inflation remains a concern.
Short-term FD rates are increased first
Short-term and medium-term deposits enjoy a hike in interest rates with banks increasing rates by at least 50 basis points (bps) for tenures of 7 days to 29 days, 30 to 90 days, 91 days to 6 months, 6 months 1 day to less than one year.
Avoid long-term investments
Avoid locking your money in a fixed deposit account for the long term and instead take advantage of rate hikes when they come by banks. A penalty is usually levied if you withdraw the investment amount before the maturity date, which can undermine the returns from your investment.
Use FD ladder strategy to avoid low returns
Fixed deposits are the most common savings instruments used by investors. However, the return on fixed deposits are low compared to other instruments. Financial planners suggest that using the FD ladder strategy helps investors get higher returns. A FD ladder is created by breaking one big fixed deposit and using the proceeds to invest in short-term plans of lower denominations. This ensures that only a portion of your money is locked in lower interest rates, but you get a higher average return amount.