FD or fixed deposit is one investment wherein your savings can grow continually with absolute safety. Certain conditions are imposed on FD withdrawal due to the attractive rate of interest, guaranteed returns, and stability. As such, most Indians have faith in this instrument when it comes to their hard-earned income.
Financial institutions, such as banks or NBFC, provide a higher interest rate against the promise of no premature withdrawals for the specified tenor. Individual institutions decide whether FD rates will increase or not as per the notifications from the Reserve Bank of India (RBI).
The Reserve Bank, along with the Union Government, has a mandate to protect and boost our country’s 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 theFD rates and lending rates.
Simply put, RBI increases repo rates during inflation for absorbing liquidity from markets and regulating credit availability. In such a scenario, a mild FD rate increase is observed as banks resort to public borrowing. The result is opposite in the case of a slowdown. During such a scenario of deflation, the RBI decreases the repo rate to inject liquidity and increase the availability of credit. The Monetary Policy Committee of India (MPC), after a thorough assessment of the economy, decides the repo rate.
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 periods of high liquidity, banks decrease FD rates, while FD rates increase during a money crunch. Due to demonetisation, banks decreased FD rates owing to accounts being flushed with liquidity. Today, one can get an idea of their FD returns simply by punching in the expected rate of interest and the tenor in a online FD Calculator.
Demand and Supply: Low demand of credit results in a decrease in the interest rates offered by fixed deposits. The opposite applies in the case of high credit demand.
Changes in Lending/Repo Rates: Usually, banks lower the interest rates contemplating a cut in lending rate influenced due to the repo rate.
Period of Liquidity: During times of high liquidity, the FD rates will decrease. However, during periods of low liquidity, a burning question arises: will FD rates increase?
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 (NPAs).
Since 2000, financial institutions and banks have offered rates of deposit in the range from 4% upto 8%. Due to decrease in rates of call-money over the past two decades, rates for 3-5 year tenor FDs fell to the range of 5.5-6.25%. Presently, call money rate is around 6%, pushing fixed deposit rates from banks within the same window. However, if an account is opened at Bajaj Markets, a reliable and stable interest up to 7.35% can be expected. In case of senior citizens, a higher interest rate up to 7.60% is offered. Along with a safety-net, investors get support with document submission and the application process.
FDs are gaining popularity as they are considered risk-free compared to equities, especially during the current times. Thus, now has to be the best time to open a fixed deposit account.