Thursday, December 8 2022
Last week announced the launch of a variable rate fixed deposit, which will offer an interest rate indexed to the prevailing Repo rate. For a deposit term between 12 and 18 months, the FD will offer a markup of 1.1% on the prevailing repo rate. At the current repo rate of 4.9%, this will yield a rate of 6%. For a deposit whose maturity is between 18 months and 3 years, the increase is 1.6%, which brings the interest rate to 6.5%. For savers, this product is an unprecedented and unique offer of its kind. Here’s why :

Savers will now be able to obtain returns at any time in line with changes in the central bank’s key rate. As the repo rate climbs, FD investors will also earn a higher return equivalent to the rise in RBI. Amol Joshi, Founder of PlanRupee Investment Services, remarks: “In floating rate FD, the rate movement will be transparent since the rates are tied to the repo rate. Savers always tend to get raw supply on this front. For years, whenever RBI raised the policy rate, banks raised lending rates for borrowers but failed to offer commensurate FD rate hikes. Pankaj Bansal, Chief Commercial Officer of BankBazaar.com, says: “FD bank rates are usually set opaquely and do not always follow RBI policy rates. With its peg to the repo rate, this new offer provides much-needed transparency.

Prashant Kumar, MD & CEO, Yes Bank, says, “One of the main advantages of this product is that the interest rate review will happen automatically and will not require any manual intervention from the bank or customers. Certainly, several banks offer their customers variable rate term deposits. However, these are mostly pegged to the 90-day bank treasury bill rate, which is not a very transparent anchor. Treasury bill rates can vary from bank to bank and depend on several factors. In addition, the reset takes place every three months. During this time, the floating rate FD linked to the repo gives clarification on the exact rate in effect and the reset will take place on the first day of each month. This will ensure that there is no lag in the interest rate reset.

So should you invest? Floating rate FDs work well when interest rates are expected to rise. This should continue over the next few months. However, these do not work in favor of investors when interest rates fall. For example, if you book a floating rate FD at a 1% markup over the prevailing repo rate of 4.9%, you would get returns of 5.9%. But if after six months the repo rate drops to 4.5%, your variable rate FD rate will be revised down to 5.5%.

There are other points to consider. The Yes Bank floating FD only offers the reinvestment option, with payment at maturity. It is therefore not for those who are looking for a regular income. For liquidity, an overdraft facility on the FD is available up to 90% of principal value. There is an early withdrawal option, but only after deducting the applicable penalty. “One of the drawbacks could be that it is only offered for a term of 1 to 3 years. Someone who wants to invest for a term of less or more than 3 years would not be able to benefit from this facility,” says Joshi The minimum deposit amount for FD variable rate is Rs 10,000 and the maximum is Rs 5 crore Seniors will be offered an additional interest rate of 0.5%.

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