- Date : 11/04/2023
- Read: 3 mins
Fixed Deposits (FDs) are a popular investment option for risk-averse individuals seeking a guaranteed return. The interest rates on FDs are influenced by various factors such as repo rates, credit and deposit growth rates, and liquidity in the financial system. Interest rates on FDs are currently peaking, making it an ideal time for investors to lock-in.
Fixed Deposits (FDs) are a popular investment option for risk-averse individuals who want to earn a guaranteed return on their savings. An FD is a type of investment in which an individual deposits a lump sum of money with a bank or financial institution for a fixed period of time, typically ranging from a few months to several years. In return, the bank pays an interest rate on the deposited amount. The interest rate is fixed for the entire tenure of the FD, and the depositor receives the interest along with the principal amount at the end of the term.
Also Read: FAQs About Fixed Deposits
What determines the interest rate of FDs?
The interest rates on FDs are influenced by several factors, including the repo rate, credit growth rate, deposit growth rate, and overall liquidity in the financial system. The repo rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks. When the repo rate increases, banks may increase their FD rates to attract deposits, and maintain their profitability. On the other hand, when the credit growth rate and deposit growth rate are high, banks may not need to offer high FD rates to attract deposits. Similarly, when there is an overall liquidity surplus in the financial system, banks may reduce their FD rates.
RBI pauses repo rate hikes
After meeting on April 6, 2023, the RBI decided to not hike the repo rate, much to the market’s surprise. This means that FDs are currently offering peak interest rates, and there is a potential for rates to reverse in the future. Therefore, it may be a good time to lock-in on FDs offering high interest rates for the longest tenures that you can afford according to your financial plan.
However, it is important to note that the interest rates on FDs are subject to market fluctuations and are not guaranteed. As a rule of thumb for low-risk investors, it’s recommended to spread your FD investments over multiple financial institutions and multiple tenures to further lower risk. Moreover, it also aids in easy withdrawals in case of a cash crunch later on.
Another important factor to consider while investing in FDs is the deposit insurance cover provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC). DICGC is a subsidiary of the RBI that provides insurance cover to depositors in case of bank failure. The insurance cover is limited to Rs. 5 lakh per depositor per bank. Therefore, it is advisable not to cross the Rs. 5 lakh limit of cumulative deposits in any bank to ensure that your deposits are fully insured.
In conclusion, FDs are a safe and reliable investment option for risk-averse individuals. The interest rates on FDs are influenced by several factors, including the repo rate, credit growth rate, deposit growth rate, and overall liquidity in the financial system. It is important to consider these factors while investing in FDs and to lock-in on FDs offering high interest rates for the longest tenors according to your financial plan. Moreover, it is essential to consider the tax implications and deposit insurance cover provided by DICGC while investing in FDs.