Fixed Deposits have long been considered a classic investment choice that consistently delivers benefits. It is safe, low-risk, and a guaranteed return. However, there is one thing that must be considered – FD interest rates do not remain constant. They are mainly variable and depend on several conditions.
Understanding their workings can help you in deciding better ways to maximize returns.
Key factors that affect FD interest rates
1. Repo rate – A major component
The interest rate at which banks borrow money from RBI is the Repo Rate. When the repo rate is high, banks’ borrowing costs increase, so they offer better FD rates to attract customers. On the other hand, if the repo rate is low, FD rates also drop, as banks have lower borrowing costs.
2. Inflation – The silent killer of wealth
Inflation gradually crunches the purchasing power of the currency. When inflation is high, banks typically raise FD rates to entice depositors. On the contrary, low inflation means lower rates.
3. FD Tenure – Longer isn’t always better
Time is one of the parameters that weigh in on the interest rate applicable to a Fixed Deposit; usually, longer tenure means better rates on Fixed Deposits. But sometimes the best rates are offered for mid range tenures, while longer-term FD interest rates might give fewer returns.
4. Type of FD – There are types and varieties
Regular, senior citizen, and tax-saving Fixed Deposits are prized differently in terms of interest rates. Senior citizens do get a little bonus while tax-saving Fixed Deposits come with a lock-in period that lets investors save taxes.
A few pointers: Senior citizens should opt for senior citizen FDs for higher interest rates. If you think tax-saving would benefit you, opt for them regardless of their lock-in period.
5. Deposit size
For larger deposits, special interest rates may apply, these are usually for deposits of ₹2 crores. Since they are sometimes offering interest rate boosts, check which bank these large deposits are currently with.
6. The Economy
A booming economy could raise interest rates, while a sluggish economy could bring them down. When banks have excess funds, they are less likely to offer competitive FD interest rates. Timing might actually be more important than you would expect!
7. Bank’s liquidity needs
The FD rates will depend on the liquidity position of the bank. If they have enough money from deposits, they may not offer good rates. Whereas, if they are struggling to mobilise money, they hike up the FD rates attracting customers.
8. Festivals and special offers
Sometimes promotional FD interest rates are launched by banks on the occasion of some festivals. These offers are mostly short-lived, so stay in the know.
9. Frequency of interest payout
You will have the option to choose between a monthly interest payout or one after some time until maturity. However, with any type of continuous payout option, you lose out on the benefits of compounding.
10. Taxation-How much money you actually get
FD interest is taxable under the heading “Income from Other Sources.” If you happen to be in the higher tax brackets, a large part of your income would be eaten away through taxation.
Conclusion
Fixed Deposits are one of the safest means of investing. However, knowing what influences interest rates would allow you to make a more informed decision and maximise your returns. By keeping an eye on economic trends and bank policies, you can time your investment for the best possible outcome.
