Are you a risk-averse investor? If your answer was a yes, then you surely know about FDs. FDs have always been a safe and secure source of investments for investors who do not prefer to take a lot of risks in their investments. They also give you a lot of returns with higher interest rates than a savings account. When you invest in the stock market, gold, or even real estate for that matter – there is always the matter of risks. Interest rate depreciation could also be a possibility.
But, though the FD rates do not change throughout the tenure of your investments (it will always be the agreed-upon interest rate when you opened the FD account) – different banks will offer you different rates of interest, and the same bank would change rates over time too. This article is going to speak about these interest rates in detail, so are you ready? Just read on to know more.
Why do FD Interest Rates Fluctuate?
FDs are just great for the investors who don’t have a high-risk appetite and want assured returns from their investment, isn’t it? They let you deposit your money for a specific time period for a rate of interest where it is typically greater than what is offered for a savings account.
But, according to experts – under macroeconomic conditions like inflation, when RBI adopts a tight monetary policy to regulate the available credit and more. RBI would usually hike the repo rates under these conditions.
What is Repo Rate?
They are rates at which the central bank will lend to the other banks across the country.
When the repo rates have been raised, you know what would be the next thing that happens. Other banks will also raise their FD rates; the cash reserve ratio rate cut brings greater liquidity into the system. The CRR cut will have a long-term impact on the interest of a deposit. While the CRR and repo rate would also affect the home loans segment, FD rates would also be skyrocketing.
If you are still not sure about what’s happening here, let’s take an example.
Example of FD Rate Fluctuations
Before you invest in an FD, you would go around figuring out the different interest rates that you can access in the market (given that different banks offer you different rates of interest). You might have searched for questions like, “what are the FD rate in BoB?” If you find that the bank of Baroda is giving you the highest rate of interest when compared to its competitors, you will choose to invest in this bank.
When you choose to invest in Bank of Baroda, the FD rates were 6% for a tenure of 7 years (now, this 6% would not change throughout your investment tenure), but when you check again, with the same question – the FD rates could have gone up to 6.95%. Now, this is an effect of the factor mentioned above.
Let’s understand what impacts the fluctuations of FD rates, shall we?
The Major Attributes that Impact the Change of FD Rates
Here are some elements that you should not miss out on to know how changing FD rates come around:
1) As already mentioned, this is one of the main factors for change in interest rates. Deposit interest rates are interlinked to the rate of inflation in the country. Banks need to give a positive return to the investor when this takes place. Therefore, you need to monitor the rate of inflation that affects the lending rates. In most cases, despite the depositors getting negative returns owing to high rates of inflation, banks don’t raise the deposit rates – since it would affect their bottom line.
2) If there is adequate liquidity, the banks do not have to focus on retail FDs for their needs as opposed to times of tight liquidity when the banks need to turn to their own deposits.
3) If there is a lesser demand for credit, banks, more often than not, decrease FD rates. On the other hand – if there is a higher demand for credit, banks increase the FD rates.
4) Banks would usually cut rates in anticipation of a lending rate cut.
5) Falling call rates also signal the amount of liquidity that is available in the market. If the call market is lending for a lower rate, it affects the interest rates on the retail deposits.
6) Banks would usually cut interest rates when the fund costs plummet. If the rate of FDs is high, a revision of base rates is less likely unless the high-cost deposit rates are cut.
7) Banks will decrease the FD rates in the near term during times of muted credit demand affecting the loan yields that mar their net interest margin.
Meaning of the FD Interest Rate Fluctuations: Ups and Downs of FD Rates
a) If there is an increasing trend in the interest rate: This means that the Reserve Bank of India is encouraging savings among the public and discourages spending. The borrowings may get more expensive as the bank would charge more interest to meet its costs of funds.
b) If there is a fall in the interest rates: This means that steps are being taken to encourage the public to spend more on goods, commodities, and services. Borrowings would get cheaper, and it allows the people to take more out on spending. This will, in turn, channel the rotation of the money in the economy.
Now, you know what it means when these interest rates shoot up or when they take some big dips.
Conclusion
So, now you know when the interest rates on FDs will go up and when they will go down. You can be sure of when to start investing in an FD and how it will benefit you in the long run. Also, irrespective of the rate fluctuations, you will always be assured of your fixed deposit returns. Moreover, you will also be enjoying some good tax benefits through an FD.
