In the aftermath of the credit policy announced by the new Reserve Bank of India (RBI) governor, few areas have started witnessing changes. Bank deposit rates have started getting impacted as the lenders have started revising the offered rates for various time maturities. Even the loan rates have started to rise. In this situation, individuals will have to take some steps to get their finances in order. Here is a look at the situation and how this can be achieved.
Fixed deposits: At present, the banking sector is facing a strange situation whereby it is witnessing a strong demand for credit, but at the same time is also facing a shortage of deposits coming to them. This liquidity crunch being witnessed in the economy will force banks to slowly increase the rate of interest that they offer on their fixed deposits. The first question here would be the time horizon for which the deposit rates would be increased, that is, whether the rates are increasing for short-term deposits or the ones with longer maturities. The key is that for each bank there might be specific time periods for which the rise might be witnessed and this could be different. Thus, making an investment after checking this would be a good way to go about the situation.
The extent of the rise in the rates is also a factor that will determine the attractiveness of fixed deposits for depositors. There have been significant rises going up to more than one percentage points announced by several banks and this investors should utilise this opportunity effectively. Also, if there are opportunities of a higher rate of return that are witnessed for longer term maturities then the individual can ensure that they lock themselves for this higher rate for an extended period of time.
Loans: The other outcome of a higher deposit rate would be that banks would also raise their loan rates to protect their margins. This would pose challenges, as there would be a rise in the rates faced by existing customers who have floating rate loans. For existing customers with floating rate loans, there is not much that they can actually do, as the change will flow to them automatically. There would not be an immediate impact for those who have taken a fixed rate loan, because the rate here remains the same for a fixed period of time. However, the individual would have to see the next time period when the loan might be reset, as there could be a change that is witnessed when this time period comes.
The other aspect is for new loan borrowers and the kind of behaviour that they must show with respect to the new loans. One of the questions for them is whether they should take a floating rate loan or a fixed rate loan? At present, since overall interest rates are high, it makes no sense to lock oneself into a higher rate of interest. The better alternative would be to take a floating rate loan, whereby, there is a chance that the interest rate could actually reduce over a period of time, which would provide relief in the period going ahead.
(The writer is a CA and certified financial planner)
