Investors are cautious regarding their investment in gold, the stock market and real estate. Fixed Deposits have consistently been a reliable source of capital for such investors. They provide excellent interest rates and security to the deposited amount. Fixed Deposits, often known as FDs, are one of the most popular financial products most banks provide to their clients. Due to its safety compared to equity investments, it is a popular type of investment. Additionally, investors are aware of the returns before investing in an FD. Therefore, it is a safe investment for investors who wish to reduce risk. It can also assist them in achieving their long-term financial goals, such as child care, home ownership, and retirement planning.
Even though Fixed Deposits are risk-free securities, banks frequently alter the Fixed Deposit interest rate. This happens as several macroeconomic variables and regulations impact the interest rates on Fixed Deposits.
Factors Involved in Change in the Fixed Deposit Interest Rates
It is important to note that banks and other financial organisations routinely revise the interest rates on FDs. Several banks offer an FD. You must choose a bank that issues the best Fixed Deposit based on its portfolio. The FD rates change over time depending on several variables, such as:
- Inflation: Inflation often arises when there is a surplus of demand over available supply in the economy, which causes prices to rise. The RBI (Reserve Bank of India) will act to lower inflation in the economy if it is high. To reduce demand, the RBI would raise the repo rates, making it more costly for banks to borrow money from them. As a result, banks will turn to borrowing from the users by raising deposit interest rates. People will be encouraged to save money and, as a result, people consume less and invest more. As a result, demand will decline, which will cause the inflation rate to drop.
- Demand and supply: Consumer purchasing patterns impact supply and demand. Less consumer borrowing indicates that there is less market demand. To maintain their primary source of income, lending, banks must cut the interest rates they provide to depositors, such as the Fixed Deposit interest rates. And, if there is greater demand for credit, banks may raise interest rates to draw in more depositors and boost their available lending capital.
- Liquidity: The term “liquidity” entails the provision of funds in the economy, particularly among banks. Banks won’t need money from the general people to lend to borrowers if they have enough liquidity. They won’t alter the interest rates as a result. It may occasionally result in lower interest rates on deposits, such as those made under FD schemes. So when banks are experiencing a liquidity crisis, interest rates on deposits will be raised to draw in money so they can keep making loans.
- CRR and SLR: The number of money banks must hold with the RBI is known as the Cash Reserve Ratio. The statutory Liquid Ratio refers to the sum of money banks must have in liquid assets like cash, gold, and other securities. The bank must retain additional deposits with the RBI to increase the CRR. As a result, the bank will request more deposits in the form of FD, savings accounts, etc., from the general public. Banks may raise interest rates on savings or Fixed Deposits even if doing so is only sometimes essential to attract more assurances from the general public. SLR falls within the same category.
What Happens When Fixed Deposit Interest Rates are Revised?
How to Profit from High FD Rates?
To profit from the market’s present high FD interest rate, consider investing in an FD. In addition to the advantage of good returns, this will assist in lowering the total risk in your portfolio. If you already have one or more FDs, consider stacking your deposits to take advantage of rate changes. For example, consider investing in many deposits with varying maturities instead of one account with a longer tenor. So that you may earn interest at more excellent rates over the coming few years, this lets you take advantage of higher interest rate when FD rate are higher.
The basic fact is that banks and other financial organisations often adjust the Fixed Deposit interest rate. Only some entities update their FD rates in the same period or by the same amount. But over time, most banks prefer to provide more excellent FD interest rates as repo rates rise. You may monitor FD rate changes and adjustments and modify your financial strategy as necessary.