Why is the Interest on a Fixed Deposit Reducing Day by Day?
Last Updated : Aug. 14, 2020, 12:43 p.m.
Fixed deposit interest rates, over the last 4-5 years, are on a downward slope, barring the year 2018 where rates moved up. The rates have fallen to even below 3% for short-term deposits across major banks in India, causing concerns for many wanting to invest in this risk-free investment product. But why is the interest rate on a fixed deposit declining so fast? Excess liquidity in the banking system, sharply reducing lending rates are some of the reasons for a decline in fixed deposit interest rates. Let’s focus on these reasons and check out the latest FD interest rates of different banks in India.
Excess Liquidity in the Banking System
The Reserve Bank of India (RBI) has initiated various liquidity measures like introducing a fresh long Term Repo Operation (LTRO) worth around INR 50,000 crore recently. Liquidity Coverage Ratio (LCR) is a key measure of ascertaining the liquidity in the banking system. The RBI wants banks to maintain at least 80% LCR. The success of the LTRO and the reluctance of banks to lend many MSMEs have meant their LCR has gone upto 120%. As per the RBI report which came on July 3, 2020, banks were found to be sitting on deposits of INR 138.6 lakh crore and they had extended loans worth upto INR 102.40 lakh crore. This means banks have massive cash with themselves but they are not lending adequately. Further, many private banks have either raised or are going to raise fresh capital from the market by issuing Qualified Institutional Placements (QIP). The excess liquidity makes banks cut on the fixed deposit rates so that they can maintain an adequate cash balance.
Growing Inflow of Fixed Deposits Across Banks
The lockdown, which was imposed in phases from March 27- May 31, 2020, has made many focus on the savings and do away with spending to save for emergency purposes. As part of the savings plan, people have added INR 4.4 lakh crore in fixed deposits from March 27 to May 8. With economic uncertainties continuing to prevail for the entire financial year 2020-21, people will most likely invest further in fixed deposits as they offer stable income to the investors. Such growth in fixed deposit volumes has made banks cut the interest rate on this product.
Sharply Reducing Lending Rates
Lending rates of banks have gone down sharply this year so far. Home loan interest rates have fallen to even below 7% for someone having a high credit score. On the whole, the home loan rate now ranges from 7%-8% per annum. Even the interest rates of car loans and personal loans have come down. The sharp fall in the lending rate has a lot to do with a 115 basis point fall in the repo rate, the rate at which the central bank lends to commercial banks, so far this year. (100 basis points =1%). As banks have their floating interest rate benchmark linked to the Repo Rate now, the rates of floating loans such as home loans and car loans have fallen by 1.15% so far. With such a reduction in lending rates, the interest rate gap between loans and deposits is getting narrower and so does the margin of banks. To ensure the gap remains reasonably high, banks are cutting their deposit rates so that they can transmit the lending rate cut benefits to the borrowers in an equitable proportion.
So What Exactly is the Fixed Deposit Interest Rate Now?
Fixed deposit interest rates have fallen to around 2.90%-6.50% per annum on average. The setting of the interest rate depends on the deposit amount and the tenure for which you want to keep money in a fixed deposit account. However, it can vary from one bank to another. The fixed deposit can run for as short as 7 days to as long as 10 years. Let’s check out the table below to know the fixed deposit interest rates of different banks.
| Banks | FD Interest Rates (In Per Annum) | Minimum Deposit Amount Required |
|---|---|---|
| State Bank of India (SBI) | 2.90% - 6.20% | INR 1,000 |
| HDFC Bank | 2.50% - 6.25% | INR 5,000 |
| ICICI Bank | 2.50% - 6.30% | INR 10,000 |
| Axis Bank | 2.50% - 6.50% | INR 5,000 |
| Bank of Baroda | 2.90% - 6.30% | INR 1,000 - INR 5,000 |
| Kotak Mahindra Bank | 2.50% - 4.90% | INR 5,000 |
| YES BANK | 3.25% - 7.25% | INR 10,000 |
As Interest Rates are Falling Apart, Shall You Put Money in a Fixed Deposit?
It will depend mostly on your risk appetite and for the time you wish to stay invested. If you are a risk-averse investor and want to park funds for the short-term, a fixed deposit can appeal to you given that you are assured of the principal amount invested in it. Also, the rate of interest at the time of booking the fixed deposit will remain the same until maturity unless you do any premature withdrawal, which could lead to a 1%-2% interest penalty. Even those who can afford high investment risks should earmark something towards fixed deposits considering the uncertainty prevailing in the economy due to the disruptions caused by the COVID-19 pandemic.
So How Can You Open a Fixed Deposit Account?
You can do it online as well as offline. If you are an existing customer of the bank and want to do it online, log in to the net banking and open a fixed deposit account online. Choose the amount of deposit and period of investment after checking the rate of interest prevailing in those. Once done with the same, submit your request. A fixed deposit account will be created instantly. And very soon, you will receive fixed deposit advice. You can even visit the nearest branch of the bank where you want to open a fixed deposit account. In case you are a new customer, you will need to submit your identity and address proofs and accompany it with a cheque bearing the amount with which you want to open a fixed deposit account. Fill the fixed deposit application form and hand over all the documents including the cheque to the concerned bank official. Once the cheque is honoured successfully, you will get an intimation on your registered mobile number regarding the opening of the fixed deposit account.