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For risk-averse investors, fixed deposits (FDs) remain one of the simplest and safest investment options to grow their hard-earned savings. With guaranteed returns and a wide variety of issuers and tenors, FDs offer a lot of flexibility.

However, the interest rates on fd can vary significantly based on several key factors. Understanding what drives these interest rate movements is crucial for investors aiming to maximise their FD earnings over time.

Here are the top six determinants that influence the interest rates offered on fixed deposits:

1.  Monetary Policy Stance

The Reserve Bank of India’s (RBI) monetary policy decisions and the resulting shifts in key policy rates like the repo rate have a direct bearing on FD interest rates. When the RBI hikes rates to rein in inflation, banks and NBFCs usually increase their FD rates to make them more attractive for depositors and ensure a continued flow of funds.

Conversely, rate cuts by the central bank put downward pressure on FD rates as lenders look to trim their interest payouts and make home/auto loans more affordable. This monetary policy cycle aimed at managing inflation and economic growth is probably the single biggest factor impacting interest rates on FDs across tenors.

As an example, during FY23, the RBI cumulatively hiked the repo rate by 250 basis points to 6.5%. In response, most leading banks/NBFCs raised their FD rates on popular tenors like 1 year and above.

2.  Prevailing Market Rates

Beyond the RBI’s policy stance, the overall interest rate environment and market liquidity conditions in the economy also influence FD rates offered by lenders. For instance, if corporate borrowing and credit offtake increase sharply due to an economic upturn, deposit-taking issuers may be compelled to raise their FD rates to attract more funds and meet lending demands.

On the other hand, excess liquidity in the banking system due to tepid credit growth or loose monetary policy could prompt lenders to reduce FD rates. This since they have ample access to cheaper sources of funds.

3.  Tenor

Fixed deposit interest rates vary significantly based on the chosen tenor or investment period. Typically, longer-term FDs offer higher interest rates compared to shorter tenors as compensation for keeping your money locked in for an extended duration. The differential can be 100 basis points or more between a 1-year and 5-year deposit.

However, when interest rates are expected to rise sharply, even short-term FDs can become lucrative. This is because you can reinvest at higher rates sooner upon maturity. Calculating your potential earnings across tenors using an FD calculator can help identify the optimal investment horizon.

4.  Deposit Amount

While not a hard and fast rule, many banks and NBFCs offer preferential higher FD rates for larger deposit amounts as they help garner more investible funds. This becomes more prominent at ultra-high investment levels above ₹1-2 Crores.

For High Net Worth Individuals (HNIs) and corporations with large surpluses, utilizing an FD calculator to compare rates can quantify the incremental gains from chasing higher bulk deposit rates versus convenience. By inputting different deposit amounts and comparing the potential returns, investors can make informed decisions about the optimal allocation of their funds.

5.  Credit Profile

Fixed deposit rates also hinge on the creditworthiness and perceived safety of the issuing bank, NBFC or corporate entity. Financially sound issuers with robust capital buffers, strong profitability and low credit risks can afford to offer comparatively lower rates since depositors value their secure credit profile and brand name over higher yields.

In contrast, relatively weaker borrowers with higher default risks need to provide higher FD rates to attract lenders and depositors. Always assess the issuer’s credit ratings, financials and asset quality before chasing higher rates from lesser-known firms.

6.  Competitive Positioning

FD interest rates mirror the issuer’s competitive positioning and business strategy in the market. For example, a leading commercial bank like HDFC Bank or Axis Bank may keep its FD rates marginally lower than small finance banks to protect its low-cost current/savings deposit franchise and cross-sell products.

Meanwhile, housing finance companies like LIC Housing Finance, HDFC Ltd, PNB Housing etc. often offer premium FD rates as they rely heavily on such public deposits as a key source of borrowing to fund their loan book growth. Factoring in your specific requirements like liquidity, ease of operation, safety and risk profile can help evaluate whether chasing higher rates from an aggressive lender makes sense.

By understanding these six key factors, investors can make informed decisions to optimise their fixed deposit investments based on their specific financial goals, investment horizon and constraints. Regular analysis aided by FD calculators, interest rate forecasts, and monitoring policy moves can go a long way in helping beat inflation and grow your savings corpus optimally through prudent FD planning.

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June 2024