Arnav Pandya: The kind of rates which you are seeing right now, I do not expect it to rise much, except maybe for some specific durations if a certain bank wants to raise it. But definitely, looking at the horizon, it is very clear that rates are going to decline from the levels which are seeing currently. Now, whether that decline comes after four months, five months or six months is an open question. But it is certain that the decline will come over the next one year and these rates which you see today might be one of the highest in recent times that you will witness.
So, now, should we also look for longer-term parking in fixed deposits? We will also talk about debt mutual funds where maybe you can play a role in a long-term investment horizon, but then specifically talking about fixed deposit, can we look at one, two, three years park in time? Will that be good enough?
Arnav Pandya: So, one is that every investor needs to look at the time period after which they need the money and that will primarily determine the time period for the fixed deposit. If they select the fixed deposit as an avenue to park some of their funds, that they will select. Now, if you look at the scenario currently, for most banks the highest rates which they offer and these range for most scheduled commercial banks between 7% and 7.5%. So, for them, the highest rates at the moment are in the one, two, three-year time bracket at different points of time for different banks.
So, if you have that kind of time horizon and if you are going to go with a fixed deposit, then obviously locking into these rates for this specific time and remaining invested for two or two-and-a-half years, then for the entire time period, you are locking in the rates right now and chances are that if you look at a shorter time horizon and then try and reinvest that amount, then when the reinvestment time comes after a year or so, you will experience lower rates than what you are experiencing right now.
So, the smarter strategy would be if you have this kind of time horizon, lock into these rates which are available at the current point of time so that you do not have any worry or a reinvestment risk coming up for that entire time duration.
Looking at the current scenario, fixed deposit rates are definitely attractive and one should be taking advantage of it as well. But then, how likely is the scenario of deposit rates going down? Also could you explain if the entire transition of rate hike in terms of deposits has been given by the banks to the customer? Has it been passed on? Unlike how we see an immediate transmission of interest rate hike when it comes to loans, obviously it is linked to a benchmark and there is a resetting period but has the same been done as far as deposits are concerned?
Arnav Pandya: If you look at this entire cycle, when the rates started rising, both in terms of the overall economy, in terms of the yields and in terms of the RBI hiking rates and what the banks have given, at least most of or rather virtually all the details have been passed on to the consumer.
Looking at the way inflation data has come for us and even for the US, rate cut, there is still time for it, for the central banks to act on it. But then, what about bond yields? Have they already factored this in that higher interest rates are there for some more time or the bond yields have gone beyond their expectations?
Arnav Pandya: So, if you look at Indian bond yields, there are two main factors at play here. One is that inflation, even though it has moderated a bit, is still above 5%. So, there is still a bit of a risk element involved because some disruption either on the food side or on the fuel side can again see inflation spike a bit. So, if that happens, bond yields will still harden for some point of time.
The second point which bond yields are also looking at very closely is the kind of situation in the debt market where the government has signalled, at least in the vote on account, that they are going to borrow less from the market and that is a good sign. The moment this translates into actual lower borrowing and the second part is that if inflation actually comes down, that is the time period when you will find that yields will start coming down. But till there is clarity on both these fronts, I at least expect that the bond yields will move within a very narrow range, but they will still remain above 7%. Good news on either of these fronts or both of these fronts will be the catalyst for yields for the 10-year benchmark yield to go below 7%. So, till then, expect yields to remain firm because there is still a lot of uncertainty and as you can see, yesterday, for example, the way the US inflation came in, which was slightly higher than expected. That at least puts the rate cut scenario off for a certain period of time. Similarly, in India, with inflation not breaking decisively on the lower side, you will find that RBI will still continue its policy of holding rates till the time the situation is slightly clearer.
Looking at the scenario right now, can one adopt a strategy of a staggered fixed deposit or maybe renewing the fixed deposit period one by one?
Arnav Pandya: If you have a longer time horizon, the idea would be that you at least now, whenever your old fixed deposit matures, you go in for that.
So, for a longer term, if you want to park in money, you can do it through debt funds. Is that the right strategy right now to do?
Arnav Pandya: Yes, for a longer term, the longer duration debt funds. You can slowly start investing into them because what will happen is that when rates actually come down, these are the ones which will see the highest gains coming into that. So, the question now is when the rates will start getting cut or when will they start coming down. There could still be quite some period of time because if the market thinks that these kind of movements in the rates on the lower side will come after six-seven months, then for those six-seven months you will not see any great extra returns coming in for these kind of funds but the idea should be that when rates are coming down, you are into long duration bond funds so that your gains are relatively higher.
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