A Comprehensive Guide to Understanding Why Fixed Deposit Interest Rates Fluctuate

Fluctuations in fixed deposit interest rates intrigue investors across all age groups. While we know that the Reserve Bank of India’s announcements on policy rates like Repo, CRR, Reverse Repo and the bank’s own MCLR rates give a direction to the fixed deposit rates, there is usually no clarity on this matter.

If you were to go to a bank’s interest rate page, you will see various tenors like 7 to 45 days, 46 to 179 days, 180 to 210 days and so on which will finally go to a maximum limit of 10 years. These are known as "Tenor Buckets” and are important segments in which each bank determines its interest rates. These distinctions are important to determine which tenor’s interest rate needs to be tweaked on an ongoing basis by the bank.

How it all begins?

The apex bank of India, Reserve Bank of India (RBI) controls the flow of liquidity in the country by adjusting the policy rates as below –

1. Repo Rate – This is the rate at which RBI lends to the banks. During high inflation when the RBI wants to reduce the money available in the system, it raises this rate, thus making it expensive for banks to borrow money from it. Same way the rates for borrowers will increase as well. Consequently, banks as well raise their fixed deposit rates as they want to raise more money from the public.

2. MCLR (Marginal Cost of Funds based Lending Rate) – though this is more related to the lending rate, it is an important determinant for fixed deposit rates. Implemented by the RBI on April 1, 2016, it is an internal rate of reference for banks below which they cannot lend. It takes into account the additional cost of arranging a loan for a prospective borrower. Hence customers with different risk perspective are offered different rates of interest.

3. Cash Reserve Ratio – this is the percentage portion of loans given by commercial banks which need to be deposited with the RBI in the form of liquid securities/cash. When the RBI cuts the CRR, the same money can be diverted into the economy for lending, thus increasing liquidity. Thus, this increase in liquidity reduces the need for deposits from the public and banks and NBFCs cut the fixed deposit rates.

4. Bank’s Net Interest Margin –Banks and other financial institutions in lending and borrowing measure their revenue by the difference of earnings on lending minus the interest paid on deposits. This is known as the Net Interest Margin. Banks also cut the deposit rates on certain tenors keeping an eye on their revenues.

5. The rate of inflation – If the rate of inflation is high, banks as well get negative revenues, and they are unable to raise fixed deposit rates.

6. Anticipation – With the signals that the RBI gives on the credit offtake in the economy, banks may reduce or increase the deposit rates depending on whether money from the public is required or not.

7. Demand and Supply – Banks and NBFCs use the deposit amounts to lend to borrowers. If there is no demand for this credit offtake from home loans and businesses due to a lull in the macro-economic conditions and business environment, banks reduce the fixed deposit rates and vice versa if the demand is high.

Company fixed deposits always offer Higher FD Interest rates as compared to bank fixed deposits. For prudent financial planning during uncertain times, one can look at locking in a higher interest rate for a longer tenure of three to five years. You can look at a company fixed deposit like Bajaj Finance FD with a minimal amount of Rs 25,000 to earn safe and high yields up to a tenor of 5 years. It is accredited MAAA/stable by ICRA and FAAA/stable by CRISIL. This means your investments are immune to any sort of market or financial risks.

You can lock in a high interest rate with Bajaj Finance Fixed Deposit (FD) and avail an additional 0.35% if you are a senior citizen. Managing FD investments is easy with Experia-your online fixed deposit account. A portfolio should have a percentage of fixed income instruments like fixed deposits to cushion it from market volatilities and company fixed deposits are a great bet offering high yields and security of superior credit ratings.