Fixed Deposits are classified as an OTC (over the counter) investment means it is traded directly between the bank and customer without the intervention of a broker. They offer higher interest rates than savings bank accounts and are more secure compared to investments like the stock market, gold, jewellery and real estate.
Fixed deposits are considered a secure and stable investment option for your money. They offer higher interest rates than savings bank accounts.
When you open a fixed deposit account with a bank, you can choose between three types of interest rates — Annually compounded premium, Half yearly compounded premium and Quarterly compounded premium. For example: If you are looking for an annual return on your FD account, investing $1,000 for one year will generate around $26 as interest amount as per quarterly rate. However, in case of half-yearly and annually compounded rates, it is $42 and $68 respectively.
How do banks operate?
What is less well-known is that banks are actually issuing credit to depositors. This credit goes to the borrowers who put their money into the bank so that they can get out of it by borrowing and investing. A bank, therefore, constitutes a second or third party between depositors and borrowers.
When the RBI needs money to lend, it sells bonds. Banks also borrow from the RBI using these securities. Therefore, when banks lend money to the central bank at a repo rate, it means they are borrowing money at an interest rate, which is known as reverse repo rate.
The base rate, or repo rate, is the interest rate at which banks and other financial institutions lend to each other. Changes in this rate can impact spending and consumption patterns.
How fixed deposit interest rates fluctuate
Various factors play a key role in changing a fixed deposit’s
Demand and supply:
The Credit and Debt Report aims to provide an insight into how consumers are using credit and how banks are responding to those changes by ensuring greater access and availability of loans in the market. This report is relevant for banks, financial institutions or any other entity involved in lending to consumers.
Inflation:
Inflation, when it occurs in the economy, is a condition where there is an increase in the prices of goods and services. This can be caused by either an increase in supply or an increase in demand. At times, both factors affect prices. So, RBI takes steps to reduce inflation when there is a high rate of inflation because it will negatively affect an economy.
CRR and SLR:
With the financial sector being entirely regulated by the central bank of India, there are certain rules and regulations that banks have to follow. One of them is the CRR. A portion of collected deposits from depositors needs to be reserved with the Reserve Bank of India. The SLR is another way in which banks provide their deposits having a large margin so that at any time when the stock market tanks down, there is enough liquidity for customers to withdraw their funds without causing any panic among others.
Liquidity:
Liquidity is the ability of a bank to get cash quickly. If there is sufficient liquidity in the system, banks are not required to draw on other sources of funds like short-term deposits or bonds. Banks can lend more money and increase the interest rates on deposits as long as there is sufficient liquidity available. This may have an impact on savings products like FD schemes that are linked to interest rates. It also impacts lending activity in general as higher FD interest rates mean more demand for loans at a given time.
What does an increase or decrease in fixed deposit rates mean?
If interest rates are increasing and fixed deposit rates are falling, this means that RBI is encouraging people to save more. In doing so, it will discourage spending and channelize money which at times could lead to inflation. Conversely, if interest rates are falling and fixed deposits rates are increasing, then it means that the bank is encouraging people not to save but instead go out and spend their money.
