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    Why do FD rate cuts fluctuate

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    Deposit Amount Range
    Tenure Range
    Interest Rate
    Up to ₹1Cr
    7 Days to 20 Years
    5.25% - 9% Quarterly compounding
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    Up to ₹1Cr
    7 Days to 10 Years
    4% - 7.75% Quarterly compounding
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    Up to ₹1Cr
    7 Days to 10 Years
    4.25% to 7.85% Monthly compounding
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    Up to ₹1Cr
    15 Days to 20 Years
    4.5% to 8% Monthly compounding
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    Up to ₹1Cr
    7 Days to 10 Years
    6% to 8% Monthly compounding
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    Up to ₹1Cr
    7 Days to 10 Years
    4% to 8% Monthly compounding
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    NRI - FD
    Up to ₹1Cr
    1 Year to 5 Years
    6.75% - 7.6% Monthly compounding
    Response Time Within 30 minutes
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    NRI - FD
    Up to ₹1Cr
    1 Year to 10 Years
    7.25% - 7.5% Monthly compounding
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    NRI - FD
    Up to ₹1Cr
    1 Year to 10 Years
    7% - 7.5% Monthly compounding
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    NRI - FD
    Up to ₹1Cr
    1 Year onwards
    7% - 7.5% Monthly compounding
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    Up to ₹1Cr
    7 Days to 10 Years
    3.75% - 7.9% Quarterly compounding
    Response Time Within 30 minutes
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    Good to Know
    NRI - FD
    Up to ₹1Cr
    1 Year to 5 Years
    7.25% - 7.4% Quarterly compounding
    Response Time Within 30 minutes
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    Overview

    Fixed deposits (FD) are ideal for investors with a low risk appetite looking for assured returns. Fixed deposits allow investors to deposit their money for a specific period of time for a rate of interest which is typically higher than what is offered for a savings bank account.

    Fixed deposit rate cuts

    According to experts, under certain macroeconomic conditions such as high inflation, the Reserve Bank of India (RBI) adopts a tight monetary policy to regulate the credit available in the country. The RBI typically hikes the repo rates under such conditions (Repo rates are rates at which the central bank lends to several banks across the country). Consequently, banks raise their fixed deposit rates. Cash Reserve Ratio (portion of bank deposits that commercial banks have to deposit with RBI) rate cut brings in more liquidity into the system. The CRR cut has a long term impact on the interest rates on deposits. While repo rate and CRR cut largely affects the home loans segment, fixed deposit rates also plummet. Several banks cut interest rates on fixed deposits in select maturity baskets.

    There are several factors which influence banks to either decrease or increase fixed deposit rates such as the following:

    • Deposit rates are linked to the rate of inflation. Banks should give positive returns to depositors. Investors should, therefore, monitor the rate of inflation, which affects the lending rates. In many cases, despite depositors getting negative returns owing to high inflation, banks do not raise deposit rates, since that would affect their bottom line.
    • Prevailing liquidity scenario in the country. If there is adequate liquidity, banks do not have to focus on retail fixed deposits for their needs as opposed to times of tight liquidity when banks have to turn to their own deposits.
    • Demand and supply conditions. If there is less demand for credit, banks, more often than not, decrease fixed deposit rates. On the contrary, if there is high demand for credit, banks increase fixed deposit rates.
    • Banks typically cut rates in anticipation of a lending rate cut.
    • Falling call rates also signal the amount of liquidity available in the market (banks borrow from the call market for their short-term needs.) If the call market is lending at a lower rate, it in turn, affects interest rates on retail deposits.
    • Banks usually cut interest rates when their fund costs plummet. If the rate of fixed deposits is high, a revision of base rates (basis for retail loans) is less likely unless the high-cost deposit rates are cut.
    • Banks decrease fixed deposit rates in the near-term during times of muted credit demand affecting loan yields, which in turn, mars their net interest margin (NIM).
    Points to remember

    Smart investors can lock in current interest rates by choosing three and five year fixed deposits prior to banks lowering fixed deposit rates. Individuals in the tax brackets of up to 10.3 and 20.6% can opt for such schemes. Secondly, experts suggest that instead of opting for just one fixed deposit of Rs. 5 lakh, investors should ideally opt for five fixed deposits of Rs. 1 lakh each to make partial withdrawal, during a financial crunch. Investors can also choose five year tax saver fixed deposit schemes, which typically offers around 8.75% to 9% rate of interest.

    Overview

    Fixed deposits (FD) are ideal for investors with a low risk appetite looking for assured returns. Fixed deposits allow investors to deposit their money for a specific period of time for a rate of interest which is typically higher than what is offered for a savings bank account.

    Fixed deposit rate cuts

    According to experts, under certain macroeconomic conditions such as high inflation, the Reserve Bank of India (RBI) adopts a tight monetary policy to regulate the credit available in the country. The RBI typically hikes the repo rates under such conditions (Repo rates are rates at which the central bank lends to several banks across the country). Consequently, banks raise their fixed deposit rates. Cash Reserve Ratio (portion of bank deposits that commercial banks have to deposit with RBI) rate cut brings in more liquidity into the system. The CRR cut has a long term impact on the interest rates on deposits. While repo rate and CRR cut largely affects the home loans segment, fixed deposit rates also plummet. Several banks cut interest rates on fixed deposits in select maturity baskets.

    There are several factors which influence banks to either decrease or increase fixed deposit rates such as the following:

    • Deposit rates are linked to the rate of inflation. Banks should give positive returns to depositors. Investors should, therefore, monitor the rate of inflation, which affects the lending rates. In many cases, despite depositors getting negative returns owing to high inflation, banks do not raise deposit rates, since that would affect their bottom line.
    • Prevailing liquidity scenario in the country. If there is adequate liquidity, banks do not have to focus on retail fixed deposits for their needs as opposed to times of tight liquidity when banks have to turn to their own deposits.
    • Demand and supply conditions. If there is less demand for credit, banks, more often than not, decrease fixed deposit rates. On the contrary, if there is high demand for credit, banks increase fixed deposit rates.
    • Banks typically cut rates in anticipation of a lending rate cut.
    • Falling call rates also signal the amount of liquidity available in the market (banks borrow from the call market for their short-term needs.) If the call market is lending at a lower rate, it in turn, affects interest rates on retail deposits.
    • Banks usually cut interest rates when their fund costs plummet. If the rate of fixed deposits is high, a revision of base rates (basis for retail loans) is less likely unless the high-cost deposit rates are cut.
    • Banks decrease fixed deposit rates in the near-term during times of muted credit demand affecting loan yields, which in turn, mars their net interest margin (NIM).
    Points to remember

    Smart investors can lock in current interest rates by choosing three and five year fixed deposits prior to banks lowering fixed deposit rates. Individuals in the tax brackets of up to 10.3 and 20.6% can opt for such schemes. Secondly, experts suggest that instead of opting for just one fixed deposit of Rs. 5 lakh, investors should ideally opt for five fixed deposits of Rs. 1 lakh each to make partial withdrawal, during a financial crunch. Investors can also choose five year tax saver fixed deposit schemes, which typically offers around 8.75% to 9% rate of interest.

    News About FD rate cuts fluctuation

    • RBI Rate Cuts Hurt Depositors, MCLR ineffective

      Due to the difficulty in rate transmissions under the base rate regime, the Reserve Bank of India (RBI) introduced a new benchmark called MCLR (Marginal Cost of Funds-based Lending Rate). Since the launch of MCLR regime on April 1st, there has been a reduction by 20 basis points. The aim of this regime was to enable banks to bring down lending rates faster. But since its implementation, the MCLR has also experienced its own difficulties and proven to be ineffective. Raghuram Rajan, Governor of the RBI, said that the MCLR is a work in progress and would be reviewed. Since January 2015, the RBI has reduced the policy rates by 150 basis points. But in the same period, the banks have cut lending rates only by about half of that. For investors and retail borrowers this has been a double whammy as the earnings on deposits have been low, while interest rates payable on loans continue to be high. There has been very little benefit to borrowers.

      20th june 2016

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