Cash is the raw material of the banking industry. Like raw materials in any industry, cash has a cost. That cost has risen sharply in 2022. In May, the RBI started raising interest rates to tackle inflation. However, banks were already flush with cash. They didn’t need to pay a higher cost to buy more cash from the markets. So FD rates were flat for a while.

Now, as demand for cash starts to catch up with its supply, banks are prepared to pay a premium for your cash. This premium reflects in rising deposit rates. Several banks now offer rates above 7 per cent. Some have just hit 8 per cent. What should depositors do to get better returns?

Risks and rewards

With higher returns come higher risks. FD returns are assured. But it’s sensible to put an asterisk next to any assured returns. This is a generic observation stripped of any nuance: some banks are just safer than others.

With the perception of safety come more customers to a bank. That bank has more low-cost cash through current and savings accounts. Therefore, that bank is in no hurry to pay more to buy more cash. So safety brings lower returns. Large banks and PSU banks are considered the safest. They have some of the lowest FD rates.

Then there are smaller banks. Their rates have started nudging 8 per cent. If inflationary pressures persist, the rates will keep rising. Bear in mind that with any scheduled commercial bank, your deposits are insured up to Rs 5 lakh by the RBI. Commercial banks are highly safe. But the insurance limit is a good guardrail to consider as you seek higher returns.

Small finance banks

Let’s start with where the highest rates are. Small finance banks typically offer the highest rates at any point in time. Every single SFB today offers rates above 7.25 on select tenors. Suryoday SFB offers 8.01 per cent on a tenor of 999 days.

Ujjivan SFB offers 8 per cent on a tenor of 560 days, with a senior citizen rate of 8.75, the highest any bank is offering today on any FD tenor. If inflation persists, these rates may soon exceed 8.50 per cent. We expect inflationary pressures to persist through the rest of this financial year. The costs of cash will increase. Therefore, the rates will increase.

Company FDs

Companies such as NBFCs and home finance companies raise cash from the market using FDs. Corporate FDs are not protected by deposit insurance. So the risks are potentially higher. These companies pay a premium over bank FD rates. But if you were to assess risk, credit ratings are a handy starting point.

AAA-rated company FDs are now offering 7.50 or higher on special tenors. AA-rated FDs have hit 8 per cent. Senior citizen rates have exceeded 8 per cent in both categories. The premium for senior citizens ranges from 25 to 50 basis points. You can buy company deposits by applying via the companies or through investment accounts selling these products.

Where are PSU banks?

Government banks, flush with cash, had raised their FD rates slowly. Rates were stuck in the mid-fives for a while. Now, five PSU banks have raised their rates to 7 per cent on special tenors. These tenors range from 599 days to 777 days.

Ten out of the 12 PSU banks now offer rates of 6 per cent or higher on select tenors, including SBI that offers 6.25 on a tenor of two years to less than 3 years, with a 50 basis point premium for anyone over 60. It’s expected that government deposits rates will rise further through this year. How much? That remains to be seen.

There’s also the post office time deposit. The five-year deposit has been paying 6.70 per cent, higher than bank deposits for a while. Now, bank rates are starting to catch up while postal rates haven’t been revised in some time.

Small banks raising rates

All 21 private banks are now offering rates of 6 per cent on select tenors. Of these, DCB Bank had the highest rates of 7.50 per cent for general depositors and 8.25 for senior citizens. The tenor is 700 days to 36 months.

The bank also offered 7.60 per cent on deposits above Rs 25 lakh without the option of premature liquidation. The highest rates are from the small banks. The large private banks were 6.50 per cent or less on select tenors.

Foreign banks

There are often some surprises with foreign banks. Many offered some of the lowest home loan rates to eligible customers. Today, a few offer above-average deposit rates as well. Citibank offers 6.75 on tenors of 181 to 400 days. Deutsche Bank 7.25 on tenors of under three years to four years.

What should depositors do? Should they lock into these rates or wait for them to climb some more? It all depends. Sometimes, 7.50-8.00 per cent is as good as it gets. If you’re satisfied with these rates, lock in for the longest possible tenors. If not, keep some cash handy to ride the rate hikes to come in the coming weeks. Laddering your deposits in any case is a good idea. That will help you get the best out of any economic situation.

The writer is CEO, BankBazaar.com