yes bank floating rate fd: Should you invest in Yes Bank’s new floating rate FD?

Last week, announced the launch of a floating rate fixed deposit, which will offer interest rate pegged to the prevailing Repo rate. For a deposit tenure between 12 to 18 months, the FD will offer a mark-up of 1.1% on the prevailing repo rate. At the current repo rate of 4.9%, this will fetch a rate of 6%. For a deposit maturing between 18 months to 3 years, the mark-up is 1.6%, bringing the rate of interest to 6.5%. For savers, this product is a novel, first-of-its kind offering. Here is why:

Savers will now be able to fetch returns in line with the changes in the central bank’s policy rate at all times. As the repo rate climbs upward, FD investors will also fetch higher return equivalent to the hike by RBI. Amol Joshi, Founder, PlanRupee Investment Services, remarks, “In the floating rate FD, the rates movement will be transparent since the rates are linked to the repo rate.” Savers always tend to get a raw deal on this front. For years, whenever RBI has hiked the policy rate, banks have hiked loan rates for borrowers but not offered commensurate hikes in FD rates. Pankaj Bansal, Chief Business Officer, BankBazaar.com, asserts, “Bank FD rates are usually set opaquely and don’t always move in step with RBI policy rates. With its peg to the repo rate, this new offering brings in much needed transparency.”

Prashant Kumar, MD & CEO, Yes Bank, says, “One of the main advantages of this product is that the revision on the interest rate will happen automatically and will not require any manual intervention by the bank or the customers.” To be sure, several banks have been offering floating rate term deposits to customers. However, these are mostly pegged to the 90-day bank T-bill rate, which is not a very transparent peg. T-bill rates may vary for banks and depend on multiple factors. Also, the reset happens every three months. Meanwhile, the repo-linked floating rate FD gives clarity on the exact prevailing rate and the reset will happen on the first day of every month. This will make sure there is no lag in interest rate reset.

So should you invest? Floating rate FDs work well when the interest rates are expected to go up. This is expected to continue playing out over the next few months. However, these don’t work in investors’ favour when interest rates decline. For instance, if you book a floating rate FD with a mark-up of 1% over the prevailing repo rate of 4.9%, you will earn returns at 5.9%. But if after six months the repo rate falls to 4.5%, the rate on your floating rate FD will be revised downward to 5.5%.

There are other points to consider. The Yes Bank floating FD offers only the reinvestment option, with payout at maturity. So this is not for those seeking regular income. For liquidity, an overdraft facility on the FD is available up to 90% of the principal value. There is an option for premature withdrawal but only after deducting applicable penalty. “One of the disadvantages could be that it is offered only for 1-3 years tenure. Someone wanting to invest for shorter or longer than 3 years term would not be able to avail this facility,” says Joshi. The minimum deposit amount for the floating rate FD is Rs 10,000, and the maximum is Rs 5 crore. Senior citizens will be offered 0.5% additional rate of interest.