Private sector lender Yes Bank on Tuesday announced the launch of floating-rate fixed deposit (FD) for domestic customers. In this new product, the interest rate will keep fluctuating based on the changes in repo rate, allowing the customers of the Bank to enjoy dynamic returns on their fixed deposits.
“This floating rate FD can be availed for a tenure of one year to less than three years, as per the customer’s preference," Yes Bank said in a statement, adding that the Bank has also raised its interest rates on standard FD up to 6.5%pa (per annum) for regular customers and up to an enhanced rate of 7.25%pa for senior citizens.
Floating rate FD is a unique offering designed to benefit customers by enabling them with an asset class that offers the safety of an FD along with dynamic returns, which are linked to the repo rates announced by the central bank. Importantly, only the reinvestment option is available with payout at maturity. There is an option for premature withdrawal but with an applicable penalty.
The minimum deposit amount of floating rate FD is Rs10,000 and the FD scheme is only available for resident individuals and non-individuals. One may continue to enjoy liquidity with an overdraft facility on the FD up to 90% of the principal value.
The revision on the FD interest rate will happen automatically and will not require any manual intervention by Yes Bank or the FD-holder. There will be automatic reset of the interest rate monthly as per the applicable repo rate in the previous month.
Prashant Kumar, MD & CEO of Yes Bank, said, “At Yes Bank, we are committed to innovation and customer-centricity as the core of our banking initiatives. We consistently strive to provide the best-in-class benefits and experience to our customers across segments. Floating-rate fixed deposit is a one-of-a-kind FD product which is yet another testament to such continuous endeavours."
Mr Kumar added that one of the main advantages of this product is that the revision on the interest rate will happen automatically and will not require any manual intervention by the Bank or the customers. “There has been careful deliberation and thought behind the launch of this floating rate FD, and it is another step towards further enhancing our retail product offering."
As the Reserve Bank of India (RBI) is in the tight monetary policy mode and increasing its key repo rates to control inflation, commercial banks are also following the suit and raising their interest rates. Several banks have increased their interest rates, including ICICI Bank, HDFC Bank and Punjab National Bank, in the past few days.
ICICI Bank has an interest rate range of 2.75%-6.50% on FDs, depending on the tenure and age of the depositors. HDFC Bank is also offering the same interest rates on its term deposits. However, Punjab National Bank is giving returns in the range of 3%-6%.
Earlier this month, the RBI’s monetary policy committee (MPC) unanimously decided to raise the repo rate by 50bps (basis points) to 4.90% with the focus on withdrawal of accommodation. This move has prompted almost all lenders to hike interest rates on loans.
Retail inflation slightly eased to 7.04% in May, according to the data released by the ministry of statistics and programme implementation (MoSPI) on 20th June. India’s headline inflation touched near-eight-year high of 7.79% in April. A sharp drop in the fuel prices after the reduction in excise duty had significantly contributed to bring down the food prices in the previous month, believed experts. The consumer price index (CPI) inflation in May remained above the upper tolerance limit of RBI, for the fifth consecutive month.
Investing in Floating Rate FDs
The interest rates on the floating rate FDs are linked to the reference rate of a benchmark instrument. As a result, they remain variable for the entire tenure and revise as per the underlying reference rate. The benchmark reference rate is reset at regular intervals and, therefore, the interest on floating rate FDs also resets in the same intervals. floating rate FDs are usually linked to benchmarks such as treasury bill rate, repo rate, etc.
For instance, if a bank offers three-year floating rate FDs with a mark-up of 1% over the prevailing repo rate (say if current repo rate is 4%), it means if you book floating rate FDs for three years, you will earn returns at a 5%pa rate. However, if the repo rate falls to 3% after six months, the rate on your floating rate FDs will be revised to 4%pa.
Floating rate FDs work well when the interest rate is expected to go up in the near future. You can invest in floating rate FDs at the prevailing rate to get the benefit of interest rate hikes in the future without breaking your term deposits. Do keep in mind that when the interest rate trend is downward, floating rate FDs can gradually become unrewarding.
Floating rate FDs can be beneficial if you don’t want to get into the hassle of continuously switching old short-term FDs to higher rate FDs.
Fixed Deposits vs Floating Rate Fixed Deposits
The interest rate offered on floating rate FDs is usually lower than the interest rate on FDs. It could be a good option to invest in the floating rate FDs when you expect the interest rate to increase in the near future surpassing the prevailing interest rate offered on the FDs and not drop below the existing FDs interest rate. That said, floating rate FDs could be a little complex as a product for investors to understand. Though floating rate FDs may offer you a higher return when rates increase, they may offer a lower return when the interest rate trend is negative.
You can also invest in FDs through the laddering technique when rates are expected to increase in the near future. You can make your own FD laddering strategy by spreading your lumpsum fund into different FDs with different tenures. It can help you average out the interest rate in the near future and reduce opportunity costs when the interest rate increases.
FDs are simpler to understand than floating rate FDs. If you understand the interest rate trend, then you can consider investing in floating rate FDs else stick to the regular FD products.
Diversifying your investment into different banks can be a good option for ensuring higher returns on your investment while also minimising the risk.