When we talk about secure investments, most Indians prefer Term Deposits. They are risk-free and offer fixed interest rates. Despite being stable, such deposit interest rates tend to fluctuate. So, if you decide to invest in Fixed Deposits, you need to understand the reason behind the fluctuations. The RBI revises the interest rates in India, and this happens through the repo rate. It is the rate at which most banks lend money to other banks in the country.
A cut on these rates lowers the borrowing capacity for banks, resulting in plummeting interest rates. This is the primary influencer of the fluctuation of the Fixed Deposit interest rate. But it is not the only parameter. There are several economic factors that impact the rate volatility. Although not frequent, it significantly impacts your returns. These are the prominent factors influencing FD interest rates:
Rising inflation
Mostly, inflation happens when there is higher demand than supply. This causes an increase in prices, which leads to economic distress. RBI has measures in place to reduce such an impact. This raises the repo rates, making it costly for the banks to borrow. Hence, banks consider borrowing from the public by providing higher interest rates. This ultimately reduces the demand and adjusts the inflation rates.
Cash reserve ratio
Banks need to keep a portion of funds with the RBI. This is called the cash reserve ratio. This is usually maintained as liquid cash, and banks do not earn any interest on them. When RBI hikes the CRR, banks should keep more deposits with RBI. Due to this, they are left with minimal funds. This increases the FD interest rates to enhance public borrowing. The decision is up to the discretion and does not always lead to an interest hike.
High liquidity
This translates to the availability of finance in the economy. If banks have enough liquidity, they do not demand funds from the public. Therefore, the Fixed Deposit interest rates remain stable. In some cases, it also causes a reduction in deposit rates. However, if banks face a liquidity crisis, they increase the Term Deposit interest rates.
Demand & supply
Here, consumers' spending habits influence the Fixed Deposit interest rate. So, if you borrow less, you affect the borrowing behaviour in the economy. So, the bank’s lending capacity gets compromised. They lower the deposit interest rates to restore the same. But if the demand for credit is higher, the interest rates on deposits increase, attracting an inflow of funds to lend more.