Bank Fixed Deposits: Why This Could Be Your Investment Sweet Spot in 2024

Consequently, many individuals are considering FD investments in 2024, expecting a further hike in the FD rates. However, the key question remains: will FD interest rates continue their upward trajectory in 2024? Is it prudent to wait for higher FD rates, or is now the right time to take advantage of the FDs offering higher interest rates? This article aims to address all your questions.

The increase in FD rates during the last year was primarily influenced by a sequence of upward adjustments in the repo rate by the RBI, starting May 2022. Following a cumulative rise of 250 basis points in the repo rate since May 2022, the central bank has refrained from further policy rate hikes since February 2023. On December 08, the banking regulator maintained the repo rate at 6.5 per cent. This marks the fifth consecutive instance where the central bank has opted to keep the primary benchmark policy rate unchanged.

It is necessary to understand that when there is an increase in the repo rate, banks typically transmit this hike to customers, leading to an uptick in FD interest rates. Conversely, when the repo rate decreases, FD interest rates also tend to decrease.

This is why the banks have not increased the FD interest rates substantially. While a few banks have increased interest rates, they are generally for a tenure of up to 1 to 3 years. There is no substantial hike in the bank FD rates of longer durations.

Currently, some small finance banks are providing returns of more than 8% per annum. Although there could be apprehensions among certain individuals regarding the security of depositing funds in small finance banks, it's essential to note that deposits up to Rs 5 lakhs with any bank are insured by the Deposit Insurance Credit Guarantee Corporation (DICGC), which operates as a subsidiary of the RBI.

Although the increase in FD rates from major banks may have concluded, the prospect of a few banks raising FD rates cannot be dismissed entirely. Depending on their credit growth, certain banks may introduce FD rates that surpass the average returns.

On a global scale, monetary policy sentiment has shifted towards a less aggressive stance, indicating that the period of the rising interest rate cycle is now in the past. This shift has created the potential for a reduction in interest rates in 2024, aiming to bolster economic growth.

Given the easing of inflation, the U.S. Federal Reserve has suggested a potential rate reduction in 2024. However, the direction of interest rates depends on the trajectory of inflation. If headline inflation decreases, it may create an opportunity for central banks to adopt accommodative measures and reduce policy interest rates.

As you may know, whenever the U.S. Federal Reserve reduces interest rates, it is anticipated that the Reserve Bank of India (RBI) will also decrease interest rates.

According to the most recent Indian Economic Monitor released by DMI Finance, global central banks are increasingly indicating that they perceive the struggle against inflation to be nearly concluded. Their policy inclination is now tilting towards reducing rates in 2024, intending to sustain ongoing economic expansion.

A reduction in the repo rate has immediate implications for investors in fixed deposits. Banks typically lower the interest rates on their Fixed Deposits when the primary policy rates decrease. The impact of an RBI repo rate cut extends to FD rates across all durations, although the extent of the decrease varies based on the tenure. Returns on both short-term and long-term FDs are expected to decline, with short-term FDs experiencing a potentially sharper reduction. While medium-term FDs with durations of 1-3 years have previously benefited from repo rate hikes, a reduction in the repo rate is likely to take a bit longer to influence a corresponding decline in medium-term FD rates.

It seems that the probability of a repo rate increase and the subsequent FD rate hike remains minimal unless there is a substantial surge in inflation. In fact, the reduction of the repo rate by the RBI may start soon, and subsequently, FD rates are expected to decrease. So, if you are eyeing the current high interest rates, it is the right time to secure the rate as personal finance experts suggest that the transmission of repo rate hikes and FD rates in banks is almost complete.

The most significant impact will likely be on short and long-term FDs once the rate cut is implemented. The medium-term FDs will likely get affected a bit later. Therefore, investors seeking favourable rates for such FDs should promptly take advantage of the current high rates. Additionally, investors have the option to construct a ladder of fixed deposits with diverse maturity periods to address various financial goals.

Furthermore, in 2024, various countries will have general elections, including India, the U.S., and Europe. This implies the potential presence of political uncertainty, and a change in administration could influence forthcoming economic policies.

Additionally, existing geopolitical risks add to the overall concerns. Speculation surrounding tensions involving the United States, China, Iran, and Taiwan, akin to conflicts such as Russia-Ukraine and Israel-Hamas, and the strengthening alliance of Russia and China, pose geopolitical risks that can jeopardise financial stability.

The recent surge in Covid cases in certain regions further compounds challenges reminiscent of the supply chain disruptions in 2020 that led to price increases.

The factors mentioned above may exert downward pressure on global economic growth, and there is a chance of a slowdown or a mild recession occurring in 2024.

Therefore, in order to diversify your investment portfolio and mitigate volatility, it makes sense to allocate a portion of your investment to debt and gold. Keeping in mind the geopolitical and economic risks, current high FD rates, and the government's stance on the repo rate, in order to diversify your portfolio and mitigate volatility, it is recommended to invest a portion of your investment or any additional savings in bank fixed deposits as now is the right time to lock the high FD rates.

However, before investing in bank fixed deposits, consider factors such as your risk tolerance, investment horizon, and liquidity needs. Remember that the current scenario is ideal for you if you are seeking to diversify your portfolio or invest additional savings in low-risk and fixed-income generating financial avenues for a medium term of 1 to 3 years.

Nevertheless, it is important to note that the current high interest rates are expected to be temporary. Many financial experts foresee a potential decline in interest rates, possibly in the latter half of 2024 or even earlier. Hence, considering this projection, allocating a portion of your investment or any additional savings to bank fixed deposits in 2024 allows you to secure the prevailing high interest rates.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.