Bank FD, PO Schemes, RBI CG Bonds
These are good times for those looking at their savings to bring in some interest income without having to deal with the volatility of the stock markets. I know I am. By some fortuitous series of events, the central banks in most countries have been on a on a coordinated rate-hiking spree. That this also means not all is well with the world economy is a given. Rate hikes are expected to have some impact on inflation and bring relief from high prices. Meanwhile last week Germany slipped into recession.
At the forefront is the US Fed which looks closely at various macro economic parameters to determine the possible hike or a stay. To complicate matters, while inflation remained high (4.9% in April 2023), payroll continued to remain resilient. Non-farm payroll increased by 339,000 in May 2023 while unemployment rate rose to 3.7%. There is hope that the US may be able to avoid recession. (https://www.bls.gov/news.release/empsit.nr0.htm)
On this side of the pond, RBI put a pause to its rate hike post the MPC meeting in the first week of April. The Repo Rate (at which the central bank lends to commercial banks) continued to remain at 6.5% while the Reverse Repo Rate (earned by commercial banks when they place excess funds with the RBI) remained at 3.35%. The MPC meets next between June 6th to 8th and the decision to hike or hold the rates will signal RBI’s read on the direction of inflation of the economy.
The one bright spot on the inflation front is the easing of the price increases. In April 2023, the combined General Index number stood at 4.7% (provisional) down from 5.66% (final) in Mar 2023 and 6.44% in Feb 2023. (https://dbie.rbi.org.in/BOE/OpenDocument/1608101729/OpenDocument/opendoc/openDocument.faces?logonSuccessful=true&shareId=0)
I am not in the business of speculating on the MPC’s meeting outcomes but a hike in June appears unlikely given the trend the last 3 months. RBI is mandated to keep inflation in the band of 2 to 6 percent.
What is in it for me?
Given that background, I take a look at the suite of products available for investment. This article focuses on a person retired from full-time employment or nearing retirement (say 2 to 3 years away) and looks at direct products. But first we set the criteria for selection. This is based on investor’s risk profile (which is a mix of risk aptitude and risk capacity), age and retirement goals. A few additional ones to narrow down the choices.
Products with interest rate would provide enough for annual operating expenses. The idea is to keep the capital untouched. However, find a ceiling. Very high interest rate products tend to come with a certain amount of credit (i.e., default) risk. Which unfortunately is not apparent or easily computable at the time of purchase of the product.
Product with high degree of transparency. These should be apparent prior to purchase. I define transparency as follows
Cost of the product (including cost of premature closure)
Amount of interest income in INR terms
Frequency of credit of interest income
Applicable tax laws
Ease of operations - digital
Here are the options that I considered and finally chose:
Bank FD
Post Office MIS and TD and NSC
RBI managed CG bonds
Not making it to the list
Post Office Insurance – product features not suitable post retirement
PO Kisan Vikas Patra – maturity prescribed by Ministry of Finance on date of deposit
PPF – lock in of 15 years
Options with features mentioned in the table
For FD interest rates, it may be best to get the most recent one from your bank since rates change based on the bank’s requirement for funds.
Now, a few lines about RBI’s direct bonds for the retail investor and also the post office schemes
RBI Retail Direct Bonds
If you are internet savvy and looking to bolster your interest income, I will strongly recommend you open an account online with RBI. The process is simple and there are videos on YouTube available on the same. Every time RBI does a fresh issue or a reissue of a bond, they will send an email with specifics. You login to your account, see what is available, select the bond you wish to buy and place your investment amount. The payment can be done via UPI or NEFT. On the allotment date you get a confirmation or a decline. The most attractive feature is there is no cost. RBI
The reason this is preferable is because RBI is ahead of the curve – most banks, to the best of my knowledge have increased interest rate on loan and other credit products while the increase in interest rate on fixed deposits have been slow.
Here is the screen shot of how the front end looks like (https://rbiretaildirect.in/#/login/)
Post Office Schemes
Government is bringing post office branches under CBS (read here). What this means is an ATM card for transactions – I got a Rupay card – and access to accounts via online and mobile banking.
I did have to go to a Post Office branch close to home to open both TD and MIS account. The process was smooth – they accepted cheque along with a deposit slip. If you are lucky to land on at a non-busy hour the entire process takes about 10 minutes. For that incremental rate of interest (compared to a bank), I am willing to put in that 10 mins.
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