Fixed deposits (FDs) have long been a favoured investment avenue for those seeking stability and assured returns. One crucial aspect that significantly influences the interest earned on your FD is the tenor – the duration for which you commit your funds.

Relationship Between Tenor and Interest Rates

The FD tenor plays a pivotal role in determining the interest rates offered by issuers. Generally, the longer the tenor, the higher the interest rates. This is due to the opportunity cost that banks and NBFCs face. In this case, they lock in funds for an extended period, and in return, they offer higher interest rates to compensate for the restricted access to those funds.


Investors opting for longer tenors benefit from the advantage of compounding interest over time, leading to potentially higher overall returns. Individuals could opt for long-term FDs to suit their goals and requirements. Additionally, they could invest in a tax-saver FD for five years to enjoy deductions of up to ₹1.50 Lakhs per financial year. This is applicable under Section 80C of the Income Tax Act, 1961. 


However, shorter FD tenors may offer lower interest rates but provide liquidity and flexibility, allowing investors to reassess their investment strategy more frequently. Investors who prioritise liquidity can consider short-term FDs.

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Other Factors Affecting FD Rates

FD interest rates are influenced by various factors, and the rates can vary from one issuer to another. Here are some key factors that affect FD rates:

  • Repo Rate and Monetary Policy

The Reserve Bank of India (RBI) plays a significant role in determining interest rates. The repo rate, which is the rate at which banks borrow from the central bank, can influence FD rates.

  • Inflation Rate

Inflation erodes the purchasing power of money over time. To compensate for this loss, issuers may adjust FD rates to offer real returns to investors.

  • Economic Conditions

Conditions, including the overall growth and stability of the economy, can impact FD rates. During periods of economic uncertainty, issuers may adjust rates to manage risk.

  • Liquidity Needs of Issuers

The liquidity needs of issuers can influence FD rates. If banks require more funds, they may offer higher FD rates to attract deposits.

  • Government Policies

Changes in government policies and regulations can affect interest rates. For example, government directives on priority sector lending or credit flow to specific sectors can impact the overall interest rate scenario.

  • Credit Demand

The demand for credit from businesses and consumers can impact interest rates. If there is high demand for loans, banks may raise FD rates to attract more deposits.

  • Credit Rating of the FD Issuer 

The credit rating of a bank or NBFC reflects its financial health. Issuers with higher credit ratings may offer slightly lower FD rates as they are perceived as lower risk.

  • Maturity Period of the FD

Generally, longer-term deposits attract higher interest rates. The maturity period chosen by the depositor can impact the offered FD rate.

  • Market Competition

The competitive landscape among banks can lead to variations in FD rates. Issuers may adjust their interest rates to attract more customers in a competitive market.

Investors should keep these factors in mind and regularly review FD rates offered by different issuers before making investment decisions. Additionally, it's crucial to consider the overall economic climate and inflation outlook to make informed choices regarding fixed deposits.


Can I withdraw my FD before maturity to adjust the tenor?

While most FD issuers offer premature withdrawals, this may result in penalties.  Check with your FD provider for their terms and conditions.

Do all banks and NBFCs offer higher interest rates for longer tenors?

 Interest rate policies vary between banks and NBFCs. It's advisable to compare offerings and choose the option that aligns with your financial goals.

How often do banks revise their FD interest rates?

Interest rates can be revised periodically based on market conditions. Stay updated with your FD issuer’s communications for any changes.

Are FD interest rates fixed for the entire tenor?

FD interest rates are generally fixed at the time of investment and remain unchanged for the entire tenor. Some issuers also offer floating rate fixed deposits. Here, the interest rate is not fixed and may vary based on market conditions or a benchmark rate. 

Floating interest rates are often linked to external factors like the prevailing market rates or the base rate set by the issuer.

Can I switch to a different tenor during the FD term?

 FD terms are fixed at the time of investment and cannot be changed. Premature withdrawal or penalty may apply if adjustments are necessary.

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