Fixed Deposit Interest Rate: Despite the buzz surrounding investing in the stock market and mutual funds, there is a section of people who still avoid investing in these potentially risky investment options. They prefer to invest in fixed deposits, small savings schemes, and recurring deposits, which provide a risk-free and fixed income over a pre-defined period.
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If you have invested in FDs as part of your financial plan, then you must be aware that the interest rates on fixed deposits do not always remain the same. Banks or financial institutions change FD rates from time to time and they vary from bank to bank. Now, the question that may come to your mind is why the rates on fixed deposits keep changing.
Will the change in rates affect customers’ deposits?
It is important to know that the interest rate at which you have locked the fixed deposit will remain applicable for the entire tenure. That is if you have invested Rs 1 lakh in a 5-year FD in a bank at 7 percent annual interest. Even if that bank increases the FD rate to 7.25 percent in the next year, you will still get the return as per the already decided 7 percent. That is, once the FD is locked, there will be no impact of further changes in rates whether increase or decrease.
Repo rate plays a big role
The repo rate is the rate at which the Reserve Bank gives loans to other commercial banks. RBI assesses repo rates every quarter and may revise these rates considering various parameters. When the repo rate increases, banks increase interest rates on home loans or other loans. Therefore, in return, they have to increase the FD rate as well. Similarly, if the repo rate decreases, the FD rate may decrease.
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When inflation is, RBI increases repo rates to limit lending. As a result, the supply of cash in the economy may decrease and inflation may be controlled. On the other hand, when the government wants to increase the cash supply in the economy to promote growth, repo rates are reduced.
Cash Liquidity and Credit Demand
In a liquidity crisis, financial institutions and banks may have to depend on retail FDs to meet their cash flow requirements. During such periods, banks or financial institutions may increase FD rates to attract more deposits. On the other hand, rates can also be reduced if there is sufficient liquidity.
General demand for credit also affects FD interest rates. Higher demand for credit can usually lead to an increase in FD rates. But when credit demand falls, banks may cut FD rates.
Call Money and Cost of Funds
Banks resort to call money to meet asset-liability mismatches to meet CRR and SLR reserves, as well as demand and supply of liquidity to meet sudden need for funds, which drives call money rates. affects. When liquidity conditions are tight, call money rises, which affects deposit rates.
When funding costs fall, banks cut interest rates. Even though interest rates are higher, base rates, on which retail loans are based, are revised. Therefore, high-cost deposit rates are reduced.
