Insights

FundsIndia Strategies: The higher-returning FD alternative

November 30, 2016 . Bhavana Acharya

For those of you setting store by bank fixed deposits, the move to demonetise the Rs 500 and Rs 1000 notes is a wake-up call. Flush with over Rs 8 lakh crore in deposit inflows, several banks from SBI to ICICI to HDFC Bank to Kotak Mahindra Bank have slashed the interest rates they pay on their FD to 7% and below in the past three weeks across maturity periods.

Rates will continue to fall
This latest cut isn’t new. It is just another in a gradual series of cuts that banks have effected in their deposit rates over the past two years. The graph below shows the gradual decline in FD rates over the past five years.

So what can push rates still further south? Policy moves by the Reserve Bank is one factor. The RBI has already been steadily bringing down the policy repo rate, which dropped from 7.75 at the start of 2015 to 6.25 now as inflation cooled off. With inflation within the comfort range and set to remain thus, further rate cuts may well take place.

Higher liquidity has flowed into the banking system following the demonetisation. With a large supply of money and a much slower deployment of this into loans, banks will want to keep their costs (deposit rates) down.

Sluggish growth in bank lending meant that banks did not cut lending rates as much as they did deposit rates in order to maintain their profitability. In order to stimulate credit growth and economic activity through cheaper loans, the RBI can further bring down policy rates.

What to do
With interest rates on bank deposits nowhere near where they were just a year ago, locking in to deposits will result in you compromising your wealth. So where do you go for an investment that is low risk but still gives you better returns? The answer is debt funds.

As a FundsIndia investor, you would have received a mail on how to get superior returns compared to FDs using debt funds. If not, log into your account and contact your advisor or mail advisor@fundsindia.com to know how to build a portfolio as an alternative to your FD.

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