With the recent pause in interest rate hikes by the Reserve Bank of India (RBI), there is speculation about whether interest rates have peaked or will rise again. While inflationary pressures have negatively impacted household finances, signs of relief are on the horizon. In April, cost price inflation eased to its lowest level since October 2021, and experts predict a return to the RBI's tolerance band of four to six per cent in 2023, according to a recent research report on 'Assured Returns' by BankBazaar, an online financial services marketplace. These developments raise the question of what lies ahead for interest rates and fixed-income instrument returns.
Government Banks: Trust & Stability
Government banks in India enjoy a reputation for safety and reliability, as the government of India backs them. Their extensive branch networks and long-standing history contribute to their credibility and trustworthiness. At present, government banks offer deposit rates exceeding seven per cent on select tenors, making them an attractive option for depositors. By opting for longer tenors, depositors can lock in these rates, reducing the risk of falling rates in the future. Given the robust and well-capitalized nature of government banks, it is unlikely that rates will rise significantly from their current levels.
Private Banks: Higher Returns & Quality Service
Private Indian banks have gained popularity among consumers for offering higher deposit returns than government banks. These banks also provide innovative and personalized financial products and services, catering to the preferences of younger and tech-savvy individuals. While the rates offered by large private banks are comparable to those of government banks, customers often choose private banks for their attentive customer service and digital banking capabilities. In addition, smaller private banks now offer deposit rates of up to eight per cent, further expanding the options for depositors seeking higher returns and quality service.
Small Finance Banks: Attractive Returns With Caution
Small Finance Banks (SFBs) were established to serve the unbanked and underbanked sections of the population. Regulated by the RBI, SFBs adhere to the same prudential norms and regulations as other banks. These banks offer some of the highest deposit rates in the market by lending at higher rates than larger banks. Some SFBs now provide deposit rates exceeding nine per cent, with rates above eight per cent being common. Senior citizens may benefit from even higher rates, reaching nine per cent. However, depositors must assess the credibility and financial
strength of SFBs before investing and keeping deposits within the DICGC insurance coverage limit of Rs 5 lakh can help mitigate risks in case of a crisis.
Corporate Fixed Deposits: Higher Rewards With Higher Risks
Corporate fixed deposits (CFDs) are fixed-income instruments issued by companies to raise capital. These deposits typically offer higher interest rates compared to traditional bank FDs. While they can provide attractive returns, investing in CFDs carries a higher risk. Deposit safety depends on the issuing company's creditworthiness, and thorough evaluation is essential to assess the risk of default on interest or principal payments. Unlike bank deposits, CFDs are not insured by the DICGC. Investors should also consider the liquidity of CFDs and potential penalties for early withdrawals. Credit ratings can help gauge the safety of CFDs, with AAA-rated and AA-rated deposits considered safer due to the reputable financial institutions backing them. Deposit safety and careful evaluation of risks are crucial when considering corporate FDs as an investment option.
Small Savings Schemes: Great Rewards Without The Risks
Indian investors have long trusted small savings schemes, also known as postal schemes, for their safety and reliability. These schemes, such as the Public Provident Fund (PPF), offer several advantages. Firstly, they are backed by the Indian government, providing risk-averse investors with security and trust. Secondly, they offer attractive interest rates and tax benefits, often higher than bank fixed deposits. Additionally, they are accessible and convenient, with a wide network of post offices and authorized banks nationwide. This popularity stems from government backing, attractive interest rates, tax benefits, accessibility, and choice of investment options.
Debt Mutual Funds: Something For Everyone
Debt mutual funds are a popular investment option in India, offering steady returns with relatively low risk. With 16 categories, every investor can find a suitable option based on their investment objectives and risk profile. From low-risk overnight and liquid funds to higher-risk credit-risk funds, there are choices for everyone. Debt funds provide an alternative to traditional fixed-income investments like fixed deposits and can offer attractive returns, especially for long-term investments. However, conducting thorough research and consulting with a financial advisor before investing in any mutual fund is important, as they are subject to market risks.
Government Securities: Sovereign, Safe, Super
Government bonds issued by central and state governments are relatively low-risk fixed-income instruments. These bonds provide assured returns backed by the creditworthiness of the government. They offer higher interest rates than traditional fixed-income investments and can be purchased directly from the government or authorized dealers. Government bonds are available in different tenors and can provide a steady income stream through interest payments and capital appreciation. It is advisable to carefully evaluate the prevailing interest rate environment and seek advice from a financial advisor before investing in government bonds.
Non-Convertible Debentures: Corporate Debt For Higher Returns
Non-convertible debentures (NCDs) are fixed-income instruments issued by companies to raise capital. They offer higher interest rates than traditional fixed-income investments and can be bought and sold on stock exchanges. However, investing in NCDs carries a degree of risk, as the creditworthiness of the issuing company must be evaluated. Therefore, thorough research, including credit ratings, is necessary to assess the risk of default on interest or principal payments. Additionally, considering the prevailing interest rate environment and liquidity is vital before investing in NCDs.
