A client must park Rs 3 crore for 3 years. Compare a fixed 7.4% with a floating rate of the policy rate plus 1.5%, if the policy rate goes 6.5%, 6.0% and 5.75% over the three years.

On the expected path floating pays Rs 68.25 lakh against Rs 66.6 lakh fixed, only Rs 1.65 lakh more. Floating wins only if the policy rate averages above 5.9% over the three years. If rates are cut faster, to 6.0%, 5.25% and 5.0%, floating pays Rs 62.25 lakh and loses by Rs 4.35 lakh. For money with a fixed date and purpose, the fixed rate's certainty is worth the small give-up.

Choosing a fixed or floating home loan is a view on where rates go; so is choosing a fixed or floating deposit, from the other side. Fixed at 7.4% locks the answer today; floating at policy plus 1.5% pays whatever the rate path turns out to be, so the choice is a view on that path. Floating beats fixed over three years only if its average rate beats 7.4%, which means the policy rate must average more than 5.9%.

Test the path, because the house view is a forecast. If the policy rate is 6.0%, 5.25% and 5.0%, floating pays Rs 62.25 lakh and loses to fixed by Rs 4.35 lakh, more than twice what it gains on the expected path. The payoff is lopsided: the upside from choosing floating is small because the 7.4% fixed rate already builds in expected cuts, while the downside grows with every extra cut. Markets set a fixed rateA rate locked for the full term, which lenders and borrowers price off where they expect short-term rates to be over that term. close to the expected average of future floating rates, so choosing floating mostly means taking the risk that the path differs.

Tie the answer to the purpose of the money. The money has a fixed date and a fixed job, a house purchase, so predictable income and principal matter more than a possible Rs 1.65 lakh extra; the view is fixed. Floating would suit a client who expects rates to stay higher than the market does, or whose own costs rise with rates, such as someone with a floating-rate loan, where floating income acts as a hedge.

Name two things the rate comparison leaves out. Both instruments must be of comparable credit quality, and she should check whether either can be broken early and at what penalty, because a three-year plan can change. And the income paid out each year will be reinvested at whatever rates prevail, which is lower for both if rates fall; that reinvestment effect is small here because the income is only a few lakh a year.