Fixed deposits (FD) are ideal for investors who have less appetite for risk and are looking for a fixed returns. Under Fixed deposits, investors deposit their money for a fixed period of time for a rate of interest. The rate of interest is typically higher than what is offered for a savings bank account.
Due to certain macroeconomic conditions such as high inflation, the Reserve Bank of India (RBI) adopts a tight monetary policy. Through this, credit availability in the country can be controlled. The RBI raises the repo rates under these circumstances. It is through repo rates at which the central bank lends funds to several banks across the country.
With the hike in repo rates, the banks raise their fixed deposit interest rates. Cash Reserve Ratio, which is a portion of bank deposits that commercial banks have to deposit with RBI compulsorily, cut brings in more liquidity into the system.
This cut has a long term impact on the interest rates on deposits. While the repo rate and CRR cut affect the home loans, the fixed deposit rates also plummet. Banks usually reduce interest rates on fixed deposits in select cases.
There are several reasons which influence the banks to either decrease or increase fixed deposit interest rates, such as the following:
Rate of inflation
Investors should regularly monitor the rate of inflation, which affects the lending rates. In many cases, even when depositors get low returns owing to high inflation, banks do not raise fixed deposit rates. It will affect their bottom line.
If there is enough liquidity, banks do not use 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 loans and credit, banks reduce fixed deposit rates. On the other hand, if there is high demand for credit, banks increase fixed deposit rates to earn more profits.
Cuts in lending rate
Banks also cut rates in anticipation of a lending rate cut.
Falling call rates also signals 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 affects interest rates on retail deposits.
Banks usually cut interest rates when their fund costs plummet. If the rate of fixed deposit is high, a revision of base rates (the basis for retail loans) is less likely unless the high-cost deposit rates are cut.
Banks decrease fixed deposit interest rates during times of muted credit demand affecting loan yields, which in turn, mars the interest rates.
Another main reason for fixed deposit interest rates fluctuation has got more to do with the bank’s asset-liability mismatch. It leads to fluctuations in fixed deposit rates.