Fixed Deposits are a secure investment for risk-averse investors and offer higher interest than Savings Accounts. They are more secure than the stock market, gold, jewellery, and real estate. It also helps you reduce the risk in the investment portfolio. Even though they are fixed-income instruments, the banks alter the FD interest rates time and again.
Various macroeconomic factors adopted by the Reserve Bank of India influence them, leading to banks countering the adverse effects. It is well-known that banks take deposits from depositors and Saving Account holders and lend them to borrowers.
How do banks operate?
Other than depositors, banks also borrow at the Repo Rate from the RBI. Vice versa, they also lend money to the RBI at an interest rate known as the reverse repo rate. The RBI controls the economy through bank lending. A change in the repo or reverse repo rates may change consumption and spending patterns.
How do interest rates fluctuate?
Various factors play a key role in changing the FD rates. While they remain stable throughout the tenure, you should be aware of the factors responsible:
Demand and supply
Consumer spending habits affect demand and supply. If the consumers borrow less, it means there is less demand in the market. If the borrowers reduce, banks resort to reducing the interest rate paid to their depositors. If the demand rises, banks increase the interest rates on their Deposit Accounts to attract more depositors and increase their funds to lend.
Inflation
If there is high inflation in the economy, the RBI takes measures to reduce it. Usually, inflation increases when the demand is more than the supply, leading to an increase in prices. Thus, the RBI will increase the repo rates, making it costly for the banks to borrow from them to control the demand. Banks will resort to borrowing from the public by increasing the RD interest rates to encourage savings and invest more.
CRR and SLR
Cash Reserve Ratio is the amount that the banks are required to keep with the RBI. Statutory Liquid Ratio is the amount that banks should maintain with themselves in the form of gold, liquid cash, and other securities. If there is a hike, banks keep more deposits with the RBI and may resort to increasing the interest rates.
Liquidity
If the banks have adequate liquidity, they do not require funds from the public to lend to the borrowers. Therefore, they will not change the Fixed Deposit interest rates. If they face a liquidity crisis, they may increase the rates to attract funds to continue their lending activities.
Conclusion
Digital Banking is safe, hassle-free, and quick. You can also check and compare the interest rates on the Banking app for convenience. Opening a high-interest Deposit Account is preferable as it leads to better returns and corpus accumulation.
