Interest rates are rising and investors who want to take advantage of it can consider floating rate Fixed deposit (FD). The interest rates on floating rate FDs are dynamic and change based on the reference rate of the external benchmark to which they are linked.

For example, on Tuesday, Yes Bank launched a floating rate FD that is linked to the repo rate, so whenever there is a change in the repo rate, it will affect the interest paid on the interest. Deposit,

After seeing a total increase of 90 basis points in the last two months, the repo rate currently stands at 4.9%. Treasury bills are another benchmark to which FDs are commonly linked.

what’s on offer

The interest rate of a floating rate FD is made up of the reference rate of the external benchmark and the spread or mark-up offered by the bank over and above the base rate. The spread is set when the FD is issued and does not change during the tenure of the FD for existing customers. However, if the bank changes its spread, it will be visible if you choose to renew the FD post maturity.

The reference rate is dynamic and affects the interest rate on FDs.

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The interest rates on IDBI Bank’s floating rate fixed deposits, or FDs, are linked to the average yield in 91-day Treasury bill auctions conducted by the Reserve Bank of India during the immediately preceding three months. For example, during the auction held between January 1 and March 30, the average yield of T-bills for 91 days was 3.74% and this is taken as the reference rate for FDs issued between April 1 and June 30.

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Punjab National Bank offers interest rates ranging from 5.2% to 5.6% on FDs with tenors of 2, 3, 5, 7 and 10 years, but Mint could not ascertain the spread on these rates and which benchmark the FD is linked to. Has happened.

should you buy

Joydeep Sen, an independent debt market analyst, said that in the current environment of rising interest rates, floating rate FDs are a good option.

“The rates will go up in the next one year, but may stop after that. Retail investors fail to track when the cycle will turn. Hence, such investors can lock-in for a shorter period ranging from a few months to two years and investors who can track the rate cycle can go for a longer period.”

However, investors should note that premature withdrawals are penalized if they choose to exit at the bottom of the rate cycle (see table). On short term FDs of up to one year, the penalty can be as high as 2-3%.

Investors should also shop for higher mark-ups. “Mark-up is an important criterion on the benchmark as it tells you how much return you can expect. Apart from the mark-up, other key points to consider are the benchmark to which it is linked, the frequency of resets and the penalty for premature liquidation of deposits,” said Pankaj Bansal, CBO,

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