Monday, December 28, 2020

Factors That Impact The Interest Rate on Fixed Deposits

 Factors That Impact The Interest Rate on Fixed Deposits

Before you delve into the factors that affect interest rates on your fixed deposit, it is imperative to understand what is a Fixed Deposit. Fixed Deposit(FD) is an investment vehicle that enables you to grow your savings at a predetermined interest rate for a chosen duration. 

It is offered by banks, Non-Banking Financial Companies (NBFCs), and corporates. It is the go-to product for investors to start their financial investing journey and if used properly can also help create a good corpus for future financial goals. 

The interest rate on FD is impacted by many factors. Some of the prime determinants of FD rates are as follows:-

1. Reserve Bank of India(RBI)’s Policies and State of the Economy

As the apex regulatory body of the Indian Banking system, RBI revises the repo rate from time to time to manage liquidity in the Indian economy. RBI lowers the repo rate to increase liquidity in the economy which subsequently exerts a downward pressure on FD rates. The RBI also tries to infuse liquidity into the system by printing new currency which consequently leads to a fall in FD rates. Thus, during an economic recession, interest rates will be lower on your FD.

2. Inflation

Rising prices curtail your purchasing power and devalue the nation’s currency. Most banks in India will provide you an interest rate slightly above the inflation rate but inflationary phases have witnessed constant or lower interest rates too.

3. Tenor of the FD

Usually, longer your tenor of investment, higher will be the interest rate offered on your FD and vice-versa.

4. Principal Amount

The FD issuer specifies the minimum amount you need to invest and the corresponding interest rate. Different interest rates are applicable to different deposit amounts.

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5. FD Issuer

Lower the credit rating of the issuer, higher will be the FD rate offered to compensate for the higher risk. Deposits of NBFCs or corporates usually carry higher interest rates than those of banks or post-offices. Small finance banks and company FDs offer one of the highest fixed deposit rates. For example, Bajaj Finance FD offers high interest rates up to 6.85%.

6. Customer type

The interest rate varies across different customer classes or types. If you are a senior citizen, existing customer or employee of the FD issuer, you will most likely get a higher interest rate on your FD. For example, senior citizens can earn an additional 0.25% interest rate with Bajaj Finance FD and online customers can earn an additional 0.10% interest rate with Bajaj Finance FD.

7. Frequency of interest pay-outs

Cumulative FDs paying principal plus interest at maturity carry a higher rate of interest than non-cumulative FDs which pay out interest at regular intervals (monthly, quarterly or semi-annually).

If you are a senior citizen you can look at Senior Citizen Saving Scheme (SCSS scheme) which has interest rates announced each quarter by the Government of India.

When looking to choose an FD to understand the differences that bank FDs and company FDs have between interest rates owing to risk levels, you should also see that company FDs work on the concept of ratings. Bajaj Finance has higher ratings in terms of stability and returns. It has the highest stability ratings with CRISIL’s FAAA/Stable rating and ICRA’s MAAA (stable) rating, so your investments are never at risk. You can also look at Systematic Deposit Plans (SDP) from Bajaj Finance where you can choose the number of deposits to be done in a particular period of time. You can decide the exact amount to be deposited each month (starting from Rs. 5000). Each deposit works like a fresh FD.

However, as non-market driven instruments, FDs are comparatively risk-free and you earn an assured sum at maturity, provide tax benefits and flexibility in terms of investment tenor.

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