FD or fixed deposit can be defined as the deposit for money rewarding a bigger interest than a normal savings account by keeping money locked-in for a specific period. Certain conditions are imposed on the frequency, withdrawal periods or amount, due to the attractive rate of interest, guaranteed returns and stability. Most Indians have trust in this instrument when it comes to hard-earned income.
Money is lent to the establishment, when a fixed deposit is opened with them. The financial institutions, such as banks or NBFC, provide a higher interest rate against the promise of no withdrawal of the money for a specified time. Individual institutions decide will FD rates increase or not as per the particular instructions by the Reserve Bank of India.
Will FD Rates increase?
The Reserve Bank, along with the Union Government, is mandated to promote our country as a sound and stable economy. RBI thus becomes the prime force which directs the monetary policy of the nation. The policy rate or repo rate acts like the elemental benchmark while deciding the rates for fixed deposit and lending rates of non banking as well as banking financial institutions. Simply put, RBI increases repo rates during inflation for absorbing liquidity from markets and regulating credit availability. In such a scenario, a mild FD rates increase is observed as banks resort to public borrowing. The result is opposite in case of a slowdown. The Monetary Policy Committee of India (MPC) after thorough assessment of the economy, decides the repo rate.
Factors which impact FD rate changes
- Prevalent liquidity situation: When adequate liquidity prevails, banks do not usually focus on fixed retail deposits for fulfilling their need, as compared to times characterised by tight liquidity which make banks turn to their owned deposits. During liquidity, banks decrease FD rates, while under money crunch, FD rates increase. Due to demonetisation, banks decreased FD rates owing to accounts flushed with liquidity. Now-a-days, one can get an idea of FD returns basis worst case scenarios by punching in estimated rate and tenure in a online FD Calculator
- Conditions of demand and supply: low demand of credit results in a decrease in the interest rates offered by fixed deposits. The opposite applies in case of high credit demand which gives rise to the question, will FD rates increase?.
- Usually, banks lower the rates contemplating a cut in lending rate influenced due to the instrument of repo rate.
- Good availability of market liquidity is signalled by diminishing rates of call money. If and only when lending is done at a lower rate by call market, this affects the speculations regarding the burning question- will FD rates increase?
Will the FD rates change with a change in the MPC repo-rates?
No. Banks take cues from the RBI about the decision of loan interest rates, however, the FD interest rates frequently rest at the bank’s discretion. Moreover, conventional banks are wary of transfer of benefits towards investors due to internal issues like low profitability and non performing assets.
Will FD rates increase?
Since 2000, financial institutions and banks have offered rates of deposit in the range of 9-10 percent. Due to decrease in rates of call-money over the past two decades, rates for 3-5 year tenure FD’s fell to the range of 5.5-6.25 percent. Presently, call money rate is around 6 percent, pushing fixed deposit rates from banks within the same window. However, if an account is opened at Finserv MARKETS, a reliable and stable interest upto 8.70% can be expected. Along with a safety-net, investors get support with document submission, application and track of deposits with objectivity and transparency.
What is the most profitable time to open an account for FD?
FD’s are gaining robust and strong momentum presently, owing to lukewarm response from equities which provides a fertile opportunity to dive into those waters. Thus, now has to be the best time to open an account for fixed deposit.