Will the rush for fixed deposits be short-lived?

livemint.com:

Bank of India (RBI) shows that about ₹10.27 trillion was locked in bank deposits in fiscal year 2023. To put this number in perspective, only about ₹1.8 trillion household savings went into mutual funds through systematic investment plans (SIPs) in the same year. Due to RBI’s hawkish stance on retail inflation and the rising retail demand for credit, term deposit rates in India have risen to their highest in the past decade.

Thus, there is a significant positive arbitrage between the nominal interest rates on FDs and retail inflation. Take the example of someone in the zero tax bracket who invests in a 400-day FD by SBI at a 7.10% per annum interest rate compared to 5% annual retail inflation, i.e., a post-tax inflation-adjusted return of 2.10% per annum. When was the last time we heard such gains from an FD? The key interest rates are expected to start reducing in the next calendar year, and the banking sector will gradually follow suit.

This makes it an excellent time for retail investors to lock in the FD rates for 3-5 years. But here comes another question: Are FDs only good for now? Will they again be a subpar product when the interest rates start going down? Perhaps, no. FDs will still be relevant (irrespective of interest rate cycles).

Here are a few reasons: Knitted in the culture: Traditionally, FDs have been the first and foremost investment instrument that Indian retail investors rely upon to park funds for their long-term plans. This has less to do with the interest rates and more with the generational confidence in the banking system. Just before the first outbreak of covid-19 (March 2020-end), the value of retail FDs in India was ₹41.3 trillion, i.e., approximately 28% of the FY20 real GDP.