Rising Interest Rates: Will FDs Be More Lucrative Than Debt MFs?

The apex bank of India, RBI, raised the key policy rates recently in its bi-monthly meeting.

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This is the second time this year that the central bank has raised the policy rates. Earlier, in the month of June, it had raised repo rate by 25 basis points. With these hikes, the repo rate currently stands at 6.5 per cent. These hikes in rates will put an upward shift on the fixed deposit (FD) rates offered by banks. Some of the leading banks have already hiked FD rates. Going ahead, it is likely that the FD rates may go up further. These hikes are being done after several years of decline in average FD rates. In the last few years, interest rates on FDs had dropped substantially. In last five year (since FY14), the rate offered by banks have dropped by anywhere between 22-28%. This has been the case, irrespective of the tenure of FDs. The highest fall in interest rates was seen in FDs of 3-5 year tenures, where on an average, the interest rates fell from 8.925% in FY14 to 6.375% in FY18. Even the savings account, which gives lowest return, has witnessed a fall in the interest rate offered by them.