In today’s volatile market conditions, investors are looking for stable investment instruments offering assured returns. A smart way to grow your savings consistently is to invest in low-risk investment avenues that offer lucrative returns.
Fixed deposit is one such investment avenue that offers fixed returns throughout your investment tenor, without any effect on your investment capital. However, the rate of return on a fixed deposit varies for every financial institution.
Are Fixed Deposit Rates Revised Frequently?
If you’ve invested in an FD as a part of your financial plan, you may know that the interest rates on fixed deposits are not always fixed. Banks and financial institutions revise their FD interest rates periodically. The rates on fixed deposits can increase or decrease over time on account of various factors.
That said, the interest rate prevailing at the time you make your deposit will be applicable to your FD account throughout the investment tenor.
For instance, you deposit ₹1 Lakh in your FD account on April 1, 2022, for a tenure of 3 years. Let’s assume that the prevailing FD interest rate on this date is 6.5% per annum. Now, say the bank decreases the FD rates to 6.25% per annum in the next quarter, on July 1, 2022. In that case, your FD will continue to earn interest at the old rate of 6.25% per annum, and the new FD interest rates will not be applicable to your deposit.
Why are FD Interest Rates Revised?
Interest rates on fixed deposits are dependent on various factors. And a change in any of these parameters may call for a revision of FD interest rates. Check out the top factors that banks and financial institutions consider before revising FD rates.
The repo rate is the rate at which the Reserve Bank of India lends money to commercial banks in case the banks face any shortage of funds. The RBI assesses the prevailing repo rates every quarter and may occasionally revise these rates due to various reasons.
For instance, during periods of rising inflation, the RBI hikes repo rates to limit borrowings from the central bank. This, in turn, reduces the supply of money in the economy and curbs inflation. On the other hand, when the government wants to increase the supply of money in the economy to boost growth, repo rates are reduced.
An increase in repo rates eventually leads to increase in FD interest rates, benefiting depositors. Similarly, when repo rates are reduced, FD rates also fall.
In case of poor liquidity, financial entities may need to rely on retail FDs to meet their cash flow requirements. During such periods, financial institutions may hike FD rates to attract more deposits. On the other hand, in the case of adequate liquidity, the need for retail FDs may not be as pressing. So, FD interest rates may not increase much or at all.
- The General Demand for Credit
The general demand for credit also influences FD interest rates. A higher demand for credit generally leads to an increase in FD rates, but when the demand for credit falls, financiers tend to cut the rates of interest on fixed deposits.
- The Entity’s Profitability
Even when repo rates increase, not all financiers simultaneously revise their FD interest rates. The extent of the increase in the FD rates also changes from one financial institution to the other. This also holds true in the case of repo rate reductions. The reason behind this variance can be traced back to the profitability of the bank or financial institution offering the FD facility.
Entities looking at higher profitability margins tend to offer only small increases in FD interest rates. On the other hand, they may reduce their FD rates significantly in case of a decrease in repo rates. Similarly, banks and financial institutions with lower profitability margin may offer more significant FD interest rate hikes if the repo rate rises.
What Should You Do In Case of FD Interest Rate Changes?
Consider investing in a fixed deposit to benefit from the current high FD interest rates in the market. This will help reduce the overall risk in your portfolio while simultaneously giving you the benefit of attractive returns.
But what if you already have an FD or two? A good way to benefit from rate changes is to consider laddering your deposits. Instead of investing in a single deposit for a longer tenor, consider investing in multiple deposits that mature at different times. This enables you to benefit from higher interest rates during times of increased FD rates, so you can earn interest at higher rates over the next few years.
So, the bottom line is that banks and financial institutions often revise FD interest rates periodically. Not all entities revise their FD rates at the same time or by the same margin. However, in the case of rising repo rates, most banks tend to offer higher FD interest rates over time. You can keep an eye out for FD rate fluctuations and revisions and adjust your financial plan accordingly.