Small finance banks offer a slightly higher interest on fixed deposits.

Is it time for higher interest on bank FDs soon?

Major private lenders like HDFC Bank, ICICI Bank, Bandhan Bank, Axis Bank have raised the interest rates on fixed deposits in the last one month. HDFC Bank has raised interest rates on fixed deposits for any amount between ₹5,000 and ₹2 crore with maturities of above 2 years by 5-10 basis points. FDs with tenure between 2 and 3 years will earn 5.2%, 3 and 5 years will fetch 5.4%, and 5 and 10 years will fetch 5.6%. Bandhan Bank has revised its interest rates on fixed deposits of any amount less than ₹2 crore as well. The revised rates for both the banks came into effect on January 12.

Currently, Indian private and public sector banks are offering FDs at an interest rate in the range of 4.9% and 6.25% for 1-2 year tenure for any sum under ₹1 crore. Smaller investors investing as low as ₹5,000 in bank FDs will enjoy the same interest rates.

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For tenure between 2 and 5 years, the range of interest rates on offer is 4.9% and 6.3%.

Investors, however, should not get swayed by the minor rise in interest rates on bank FDs. The small hikes do not mean much, says Adhil Shetty, CEO, Bankbazaar.com, because banks and corporates adjust rates all the time. "There have been such minor upward revisions even in 2021. However, if inflation keeps hardening, we may see rate hikes across the board," Shetty says.

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Inflation is spiking globally, which means that there is higher demand for goods, services, and even money. With greater demand chasing money, the cost of money is also going to go up. But, interest rates have been subdued for the last two years. The central bank has been accommodative by keeping rates low to manage economic pain caused by the pandemic. But if inflation keeps on rising, at some point, interest rates will go up again. As interest rates go up, the cost of borrowing for banks will rise. Consequently, banks will resort to borrowing from the public by increasing the interest rates on deposits.

Small finance banks offer a slightly higher interest on FDs. Suryoday Small Finance Bank offers the highest interest rate of 7% on FDs below ₹1 crore for a term of 2-3 years. For FDs maturing between 3 and 5 years, the highest interest rate on offer is 6.75%.

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