Risk-averse investors have always relied on fixed deposits as a secure source for their investments. Offering higher interest rates than a normal savings account, FDs are more secure than investments in the stock market, real estate, and gold. Banks charge interest rates on FD schemes time and again. This happens as a result of FD interest rates being influenced by various factors. Let’s understand the basic mechanism of any bank and the basis on which interest rates are charged.
Banks take deposits from their depositors and lend them to their borrowers. Other than the depositors, banks also borrow from and lend money to the RBI. The interest rate charged by the RBI from the banks is known as Repo Rate. Conversely, the interest rate at which banks lend money to the RBI is known as Reverse Repo Rate. A change in the repo rate or reverse repo rate can alter spending and consumption patterns.
Eligibility Criteria for opening a bank FD
- Indian resident
- Member of the Hindu Undivided Family
- Firms with Sole Proprietorship
- Firms with partnership
- Trusts
- Limited Companies
Documents needed to be submitted for opening an FD
- Government validated identity and address proof
- PAN Card
- Form 15G/15F (if you need an exemption from TDS)
- Recent passport-size photograph
Benefits of opening an FD account
- Some renowned banks such as Axis, SBI and HDFC FD interest rate give senior citizens an additional 0.50% p.a. interest rate over the regular rate
- The minimum deposit amount for opening an FD is as low as Rs. 5000
- The bank provides a nomination facility
- Facilities like a sweep in and super saver are available on the FD account
- The depositor can earn compound interest by reinvesting the principal along with the interest amount earned on the FD
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Types of FD schemes
1. Regular fixed deposits
This scheme allows the depositor to avail of a 90% loan facility on the deposit. The interest income earned is taxed under Tax Deducted at Source (TDS) as per the Income Tax Act, 1961. With a tenure ranging from 7 days to 10 years, this FD scheme can be opened or closed easily by using net banking.
2. 5-year tax-saving fixed deposit
This FD is solely meant for tax savings u/s 80C of the Income Tax Act, 1961. In case there is a joint deposit, only the first holder is eligible for tax benefits under this section. The interests on deposits are compounded annually. The depositor can opt for a monthly or quarterly payout. Resident Indians and adult members from HUFs qualify the eligibility criteria for this scheme.
3. Foreign Currency Non-Resident (FCNR) fixed deposit
This FD scheme allows Indians to earn interest on their foreign income. The FD holder is allowed to invest money in foreign currencies and gets back the complete principal amount along with interest. Depositors also enjoy tax exemption on the entire deposit.
4. Non-resident Ordinary (NRO) fixed deposit
This FD account can only be opened by an Overseas Citizen of India (OCI), Person of Indian Origin (PIO) and Non-resident Indian (NRI). Any income earned by people falling under these three categories can be deposited only into NRO FD accounts.
5. Fixed deposit with monthly payout
The accumulated interest amount under this FD scheme is paid on a monthly basis. In this case, the accrued interest is neither added back to the principal amount nor is it compounded. You can choose to receive this monthly interest amount in your savings account and use it for meeting any expenses that you wish to.
Term-wise FD interest rates and their benefits
Short term deposits
- Bank FD tenure: 7 days to 12 months
- The interest rate offered: 2.50% to 4.40%
Mid-term deposits
- Bank FD tenure: More than 1 year but less than 5 years
- The interest rate offered: 4.90% to 5.30%
Long term deposits
- Bank FD tenure: 5 to 10 years
- The interest rate offered: Flat 5.50%
FD interest rate calculation
Term deposits: Tenure below 6 months and quarterly interest payout option
Interest calculation: Quarterly basis
Term deposits: Tenure below 6 months and monthly interest payout option
Interest calculation: Calculated quarterly and paid monthly at a discounted rate over the standard deposited rate
Term deposits: Tenure below 6 months with interest reinvestment option
Interest calculation: Cumulative interest for the quarter is added to the principal in the subsequent quarter; interest is calculated on the total amount
Term deposits: Tenure equal to or above 6 months
Interest calculation: Simple interest paid
Factors influencing FD interest rate fluctuations
1. Demand and supply conditions
An increase in the amount of money made available to the borrower increases the supply of credit. Lesser demand for credit induces reduced fixed deposit interest rates and vice versa. The more a bank can lend, the more credit is available to the economy. The interest rates tend to go down in recessionary times.
2. Inflation
Depositors expect a positive return from banks. The inflation rate considerably affects the lending rates. The higher the inflation rate, the more interest rates are likely to rise. The RBI increases the repo rates to make it costly for the banks to borrow from them. Banks, in turn, resort to borrowing from the public. This leads to increased FD interest rates on deposits, hence encouraging savings among the public.
3. CRR and SLR
Cash Reserve Ratio (CRR) refers to the volume of funds that banks need to keep with the RBI. On the other hand, Statutory Liquid Ratio (SLR) is the volume of funds that banks require to maintain with themselves in the form of gold, liquid cash, and other liquid securities. If a bank hikes its CRR or SLR, it might consider increasing the FD interest rates to increase public deposits into its accounts.
4. Liquidity
If banks have sufficient liquidity, they won’t require raising funds from the public for lending to their borrowers. Conversely, if a bank is facing a liquidity crisis, it might resort to the public for funds. Both these phenomena will respectively lead to an increase or decrease in the interest rates on fixed deposits. The fluctuation of interest rates keeps the money rotation in the economy channelized.
Reputed Indian banks such as SBI, Axis and HDFC FD interest rates range from 2.50% to 5.50% p.a. for general citizens and 3.00% to 6.25% p.a. for senior citizens. At Groww, you can compare the different rates provided by various banks on their FDs and then select the one you wish to opt for. Visit Groww for more insights on fixed deposits and interest rates.
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