Hike in short-term fixed deposit interest rates: Opt for a laddering strategy

financialexpress.com:

As State Bank of India has increased short-term fixed deposit rates by 25 to 75 basis points, a move likely to be followed by other banks, individuals should now adopt a laddering strategy for deposits up to one year. There would be a clamour for short-term deposits with the one-year bank fixed deposit rates nudging higher, and longer-term rates possibly remaining flat.

Individuals should divide the amount and invest in varying maturities, instead of putting the entire amount in a single deposit. Lenders having high loan-to-deposit ratios may increase their short-term deposit rates to attract fresh money for funding their credit growth.

Since February, banks such as Axis Bank, Punjab National Bank, HDFC Bank, and IndusInd Bank have increased their short-term fixed deposit rates. So, given the upward trajectory of short-term rates, employing a laddering strategy for short-term deposits can be particularly advantageous. In fact, this will enable reinvestment opportunities whenever there is a chance to secure higher interest rates. Individuals should look for banks offering flexible short tenure options ranging from up to 179 days, up to 210 days, one years and two years. This strategy will help maximise returns over time, provide liquidity at regular intervals and reduce the risk of being locked into a single rate for a long period.

Adhil Shetty, CEO, Bankbazaar.com, says laddering fixed deposits will benefit investors from changing interest rates. “If rates rise, you can reinvest matured deposits at higher rates, potentially increasing your overall returns. Conversely, if rates fall, only a portion of your money is affected, as the longer-term deposits were locked in at higher rates earlier.”

Short-term deposits have