Indian investors are traditionally alight towards safe investment options like fixed deposits. Fixed deposits are the one investment where every investor likes to park some amount of money to reduce investment risk. Using a fixed deposit you can invest your idle money and earn decent interest while keeping your investments safe from market fluctuations or sudden loss. Banks encourage depositors to deposit money with them. This enables the banks to create a pool of money that can be utilized by the banks to provide loans to borrowers.
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However, multiple rate cuts have left people confused over whether they should or shouldn’t opt for fixed deposit investments. Through this article let’s try to understand why the FD is falling and what you should do in such circumstances?
The RBI has reduced the benchmark repo by 75 basis points since February 2019. The banks followed suit and have gradually reduced the interest rate on fixed deposit. As per reports, the rate of interest offered by the State Bank of India has been reduced by 25 basis points between the months February to June. This means that rates on fixed deposits below Rs. 2 crore has been reduced from 6.85% to 6.60% for deposits with tenure 5 years and above.
The main question here is why the deposits interest rate is reducing? It has been observed that banks reduce the deposit interest rates swiftly in falling interest regimes while they have been reluctant to quickly increase the deposit interest rates when the benchmark rates go up.
See Also: Benefits of Fixed Deposit in India
There are several factors under the macroeconomic conditions that have led to multiple rate cuts. The central bank of the country i.e. the RBI is the regulatory body that monitors and implements policies to regulate the credit available in the market. Thus a hike in the repo rate helps the RBI to contain inflation by controlling the cash flow in the economy. Thus the banks raise their fixed deposit rates.
Similarly, CRR rate cuts bring more liquidity into the system. However, it has a prolonged impact on the interest rates of deposits. Thus rate cuts affect several segments of the bank like FD interest rates and the home loan interest rates. This is why some banks have reduced the FD interest rate in select investment horizons and have refrained from reducing the overall interest rates of FD.
Factors influencing the banks to increase or decrease the FD interest rates:
The current tides are difficult for any type of investor due to multiple rate cuts on deposits and the underperformance of the share market. To keep your investment safe, you should go for fixed deposits of tenure ranging from 1 to 3 years. This way you can lock-in the current interest rates in case the rates further go down. It is also advisable to ladder your FDs and spread your investments across smaller amounts instead of going for a single deposit. Else you can opt for 5-year tax-saver FD that enables you to fetch a good amount while saving on taxes.
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