Why Do FD Rates Fluctuate?
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 Changes
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.
Factors Which Impact FD Rate Change
- Changes in Repo Rates - 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.
- Prevalent Liquidity Situation - 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.
FAQs on why do FD rate cuts fluctuate
- What is the most profitable time to open an account for FD?
Before the interest rate cycle turns, it can be a smart idea to open a fixed deposit and lock in at high rates.
- Do FD rates fluctuate?
Yes. Banks keep on changing their FD interest rates time and again.
- Will the FD rates change with an alteration in the RBI MPC repo rates?
Yes. FD rates keep on changing with an alteration in the RBI MPC repo rates.
- Will FD rates increase in future?
Yes. FD rates will undoubtedly increase in future.
- Which two variables have the biggest effects on rates on fixed deposits?
The current state of the economy and the central bank's (RBI in India) policy decisions are the two primary variables influencing fixed deposit rates.
- What is the impact of RBI MPC repo rates on FD rates?
The amount of money that institutions can lend to one another and to their clients is determined by the repo rate set by the RBI MPC. The repo rate will decrease in an environment of low inflation and increase in an environment of high inflation.
- When is the best moment to open a fixed deposit that will yield profits?
Regularly checking the interest rates established by banks or NBFCs is advised. Opening a fixed deposit now would be ideal because they can give good returns during periods of high interest rates.
- Why do different financial institutions' FD rates vary?
FD rates differ based on a bank’s or NBFC’s financial strength. Higher capital means better ability to absorb losses and manage costs, which usually leads to better FD rates.
- How do fixed deposits affect RBI MPC repo rates?
The repo rate, a benchmark interest rate, is determined by the Monetary Policy Committee (MPC) of the RBI. It affects banks’ borrowing costs and FD rates. Inflation and other economic factors guide these changes, influencing the real value of your FD returns.
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