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Why FD Interest Rates Are Going Down in India?

IndianMoney.com Research Team | Posted On Thursday, March 05,2020, 03:45 PM

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Why FD Interest Rates Are Going Down in India?

 

 

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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See Also: Fixed Deposit Interest Rate: Best FD Rates By Top Banks in 2020?

Why FD Interest Rates Are Going Down in India?

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?

Fixed Deposit Rate Cuts:

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

Factors Influencing the FD Rate Cuts:

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:

  • Banks must provide positive returns o depositors to keep the balance. On the other hand, investors must monitor the rate of returns they are getting with respect to inflation. In any circumstances, investors should not get negative returns owing to inflation while banks are
  • Banks are also likely to decrease the fixed deposit rates if there is a low demand for credit in the economy. Consequently, banks hike the interest rate of FDs when there is a high demand for credit in the economy.
  • Commercial also tends to reduce the interest rates when the fund cost reduces. Thus if the fixed deposit interest rates are high a revision on the base lending rates is unlikely unless there is a reduction in the FD rates.
  • When there is enough liquidity in the country, then banks do not need to pool money from retail investors. However in cases where there is less liquidity banks will have to make use of their own reserves.
  • The reduction in call rates indicates the liquidity available in the market. thus if the call interest rate reduces leading to lower rate on short-term lending, then it affects the rate of interest on fixed deposits.
  • Banks have also reduced the interest rates on FDs at times of muted credit demand. Such a scenario impacts yields from loan affecting the net interest margin of the banks.

See Also: How to Start Fixed Deposit and Best Fixed Deposit Interest Rates-2019

What Should You Do?

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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