Fixed Deposits are well known for security of funds and substantial interest. FDs have a ﬁxed maturity, usually preventing early withdrawals. The interest rate on FDs are fixed in advance. Surplus liquidity has forced financial institutions to cut rates of most deposits. Fixed deposit interest rates are also declining in India still, rates are competitive with different banks, NBFCs, and other financial institutions help depositors to earn a significant accumulated amount.
Determinants of Interest Rates on Fixed Deposits
Cut in deposit rates typically lead to shifts in the lending rates as financial institutions have to maintain margins. The fixed deposits rate depends on a wide range of factors that can be bank-speciﬁc, account-speciﬁc and macroeconomic such as liquidity conditions in the market and how governments and apex banks target interest rates in the economy.
- Macro Variables
- Market Rate
Financial institutions work in a wider economic environment. Decreased money market rate makes risk-free securities like FDs less attractive.
- Market rate volatility
A decrease in the market rate volatility lowers the reinvestment and reﬁnancing risks that affect FD interest rates negatively.
The inflation rate in India is high, therefore, fixed deposit India may fail to give inflation-beating returns. However, inflation can be handled by investing in short-term fixed deposits like Bajaj Finance FDs for 12-60 months which provide high interest rates up to 6.85%.
- Economic growth
Changes in the supply and demand graph of deposits also affect the FD rates.
- Stock market stress
Higher the stress in the stock market, lower the participation in it. And therefore, investors will get directed to risk-free investments like fixed deposits.
- Bank-speciﬁc Variables
- Bank risk
It is associated with the reputation and capital ratio of a financial institution. Credit rating determines the creditworthiness of a financial institution.
- Bank size
Financial institution size is also relevant for deposit demand. The bigger the institution size, the less reluctance to deposit funds.
- Foreign bank
Foreign banks have to offer an attractive interest rate to attract deposit funding.
- Liquidity surplus
There is a negative effect of liquidity on the deposit interest rates.
- Account-speciﬁc Variables
- Maturity Period
The longer maturity deposits are likely to have a higher stable interest.
- Interest Payment Frequency
Depositors can opt for the interest payments monthly, quarterly, or bi-annually instead of on an annual basis, in case of non-cumulative FDs but it might decrease the interest rates.
- Withdrawal Charges
Penalty charges are applied if depositors withdraw funds from their FD account that will affect the interest rates.
Therefore, after getting affected by the above determinants, fixed deposits interest rates are between 3.00% – 6.70% with most of the banks. Post office fixed deposit interest rate is up to 6.7% for 5 years deposits.
Bajaj Finance FDs are offering interest rates up to 6.85% including 0.10% additional interest rate for online FD and 0.25% extra interest rate for senior citizens. Depositors can invest online and access their FD account online. As you have seen credibility and ratings are also one of the important factors affecting interest rates, Bajaj Finance has earned highest stability ratings with CRISIL’s FAAA/Stable rating and ICRA’s MAAA (stable), so your FDs are never at risk with Bajaj Finance. Apart from high interest rates, Bajaj Finance FD also offers various other benefits such as flexibility to choose the frequency of periodic interest payouts, online FD calculator, loan against FD, premature withdrawal facility, and multi-deposit facility.
Gaurav Khanna is an experienced financial advisor, digital marketer, and writer who is well known for his ability to predict market trends. Check out his blog at Highlight Story.