Changing bank fixed deposit rates is a much-awaited announcement each quarter when the RBI (Reserve Bank of India) modifies its own rates. It does not directly change the fixed deposit rates but only the rates at which it issues to banks. These are generally terms like REPO rate, Reverse REPO and Bank rate. Out of these, the REPO rate is very important.
Meaning of REPO rate and Its Importance
In India, the repo rate denotes the rate at which banks borrow funds from the RBI (Reserve Bank of India). RBI visits the repo rate every quarter to maintain the balance within the economy.
In February 2023, RBI increased the repo rate by 25 basis points to curb the rising inflation and control the liquidity in the system. Due to higher interest rates on loans, institutions might increase their FD interest rates to secure long-term cash from deposits rather than borrowing from RBI. One must acknowledge similar market conditions to invest in fixed deposits for higher interest earnings.
Factors Impacting FD Rate Change
Here are a few factors discussed that indirectly impact FD investments.
A country’s liquidity is one of the significant factors affecting the inflation rate. During the time of adequate liquidity, banks keep lower interest for FDs to borrow from other banks rather than securing FD funds for their capital needs. Contrary to this, banks increase the interest rates to attract FD funds when borrowing from the central bank and other commercial banks is more expensive.
RBI Base Rate
RBI is the central regulatory authority for all public, private and commercial banks in India. They either increase or decrease the base rates as per the current needs of India’s economic condition. The RBI base rate is the benchmark rate at which banks and financial institutions apply and offer loans and advances. The base rate indirectly impacts the FD rates since the banks decide their FD interest rates based on the repo rates.
Demand and Supply
The capital needs of the borrowers are affected by the market fluctuations in the demand and supply of credit in the country. When there is a high demand for credit, institutions apply lower interest rates for FDs, and when there is not much demand for credit, high-interest rates on FDs are offered to attract more FD investments.
Impact of Changing Interest Rates on Fixed Deposits
- When there is an increase in loan borrowings with bank advances, numerous sections of the country are affected since loans are utilised in almost every sector of the economy. The government, with the help of expert advisors, needs to curb over-inflation and maintain price hikes for economic efficiency. Although there are no negative effects on deposits, they still are impacted due to the changes in the country’s liquidity.
- There is no change in the FD rates once the account is booked or initiated by the account holder. However, FD investors must understand what economic conditions affect the interest rates offered on FDs. To understand the fixed deposit account meaning, individuals must visit the official website or the bank branch offering FD services.
- When the account holder has opted for a floating rate FD which indicates a changing interest rate as per RBI policies, they have consistent changes in interest earnings due to the changes made by the central bank and finance ministry throughout the year. An increase in deposit interest rate will generate higher interest earnings for the quarter, and similarly, a decrease in the RBI base rate will ultimately apply lower interest rates on regular and fixed deposits.
- Depositors after understanding the fixed deposit account meaning are keen on FD investments to park their fund corpus in an interest-increasing scenario. They look out to take full advantage of the economic conditions when the central bank increases the base rate to control inflation. The increase in base rate affects all banks, and higher interest is levied for their new borrowings. Hence, with a high probability, they increase fixed deposit interest rates to avail themselves of easy deposit liquidity instead of borrowed funds.
- Ultimately, the country’s economic condition with less liquidity and high-interest rates on lending is favourable, and vice-versa, a tight liquidity situation with lower interest rates on loans is less profitable for FD investors in India.
Fixed deposits are the traditional financial products to earn confirmed periodic interests. Large fixed deposit account holders can break their FDs into various small FDs to generate interest incomes from volatile market situations. The tenure for FDs must be short when markets are highly volatile, and similarly, they must be locked in for longer tenures when overall inflation is high.