Investment returns for floating rate FDs are based on a reference rate, such as the repo rate of the Reserve Bank of India (RBI) or a Treasury Bill yield. In contrast to a regular Fixed Deposit (FD), where the interest rate is fixed for the duration of the deposit, the interest rates applicable on a floating rate fixed deposit are linked to the prevailing repo rate. Since floating-rate fixed deposits are benchmarked to repo rates and provide you with a dynamic rate of interest, the interest rate automatically resets periodically to reflect the repo rates that were in effect. The Reserve Bank of India (RBI), in its monetary policy meeting held on December 7, 2022, hiked the repo rate by 0.35%, bringing it to 6.25%. This is the fifth time in a row since May of this year that the repo rate has been hiked. Since May, RBI has hiked the key rate by 225 bps in FY23, hence amid the rising interest rates on fixed deposits, should one invest in a floating rate fixed deposit, let’s know from our industry experts.
Prashant Joshi, Managing Director and Head-Consumer Banking Group, DBS Bank India said “Returns on investments for floating rate FDs are linked to a reference rate, like the Reserve Bank of India’s repo rate or a Treasury Bill yield. A floating rate typically benefits short-term deposits of up to two years. Considering the current scenario where the RBI has announced a sequence of rate hikes since May 2022, interest rates may increase further in the near term. However, under the present interest rate regime, retail investors would be best served by a traditional FD. For instance, DBS Fixed deposits address higher yield requirements with a 7.25% (7.75% for senior citizens) for regular customers. Traditional FDs provide guaranteed returns that are not linked to fluctuations in the market, making them the safer option.”
Nitin Rao,Head Products and Proposition, Epsilon Money Mart said “Investing in FDs during rising rates has a benefit as it offers attractive investment opportunity. However, a floating rate FD will follow the interest rate scenario. Currently, we are in a rising interest rate regime which makes floating rate FD very attractive but once we enter the reducing interest rate regime these FDs will lose their sheen. One can consider Floating rate FDs if they have a short to medium vision of 2-3 years and can take advantage of rising interest rates. Finally, the investment decision depends on the client’s needs, risk approach and taxation, one should always discuss with their financial advisor before investing.”
Niraj Bora, Founder of Surmount Business Advisors Pvt Ltd said “Fixed deposits are typically meant for small savings and liquid investment instruments. Raising interest rates are again a matter of monetary and credit demand and supply. An increasing trend might not make much of a difference for a 3-5 year FD. An investor should neither increase the allocation of FD in overall investment portfolio due to increased rates nor go for floating rates as these are again temporary and the target should be for 3-4 years minimum horizon.”
Nidhi Manchanda, Certified Financial Planner, Head of Training, Research & Development at Fintoo said “As we are in the rising interest rate scenario, and it is unlikely that interest rates will fall significantly in the near future, one can explore opportunities to invest in floating rate fixed deposits. In fact, there is a high probability of witnessing a few more moderate rate hikes in coming quarters. Thus, one may invest in floating rate FDs now offering comparatively higher interest rates with even higher expected interest rates in coming quarters. Having said that, please note that repo rate hikes are yet to be fully reflected in FD rates of all the banks.”
She further claimed that “It is further suggested to not opt for a very long-term floating rate FD. This is because, in the long term, interest rates are likely to come down from these elevated levels. It is therefore suggested you may opt for Floating rate FDs for a period of a maximum of 2 years. An investment tenure longer than this, might put an investor at risk of interest rate reduction. So, it makes sense to invest in long-term fixed rate FDs when the interest rates are peaked out to lock in the higher rate of interest for the long term.”
The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.