Fixed deposits (FDs) are a popular investment option for many Indians. Various economic factors impact the interest rates you can get on FDs in India. This article will help you explore the critical determinants of FD rates in 2024.
Top 5 Factors That Impact Fixed Deposit Interest Rates
Let’s examine the top 5 factors that impact interest rates offered on fixed deposits:
1. Existing Interest Rate Regime
The existing interest rate cycle can help you get a clue about the future FD rates. Currently, the repo rate is at 6.25%. The RBI has maintained a cautionary stance for quite some time now.
If the central bank decides to hike the repo rates in anticipation of high inflation, formal financial institutions in India will have to offer higher interest rates on fixed deposits to fund the economy’s credit growth requirements.
2. Monetary Policy Committee Decisions
The RBI’s Monetary Policy Committee (MPC) monitors economic indicators and makes policy decisions on key rates. If it feels inflation is under control, it may keep rates steady or even reduce them to impetus economic growth.
This could lead to maintaining the status quo or financial institutions offering marginally lower FD rates. However, if inflation remains high, the MPC might begin to raise interest rates; this could help you earn higher returns on your FDs.
3. Competition Among Financial Institutions
Financial institutions in India compete intensely to source lower-cost funds from the public. When large banks increase their FD rates to attract more deposits, others must follow suit to remain competitive.
This competition ensures that FD rates remain attractive. The entry of small finance banks and payment banks in recent years has intensified the race for securing fixed deposits further.
4. Macroeconomic Conditions
The economy’s overall health affects the interest rates financial institutions can offer on fixed deposits (FDs). When the economy is doing well, and businesses are growing, these institutions issue more loans.
This increases the demand for money that they borrow from depositors through FDs. So, these financial institutions offer higher FD rates to attract more deposits. However, when the economy is weak, businesses take fewer loans.
This reduces the need for financial institutions to secure money from deposits. Plus, they earn lower profits on loans when the economy declines, so they are less able to pay high FD rates.
5. Political Stability
The economy performs better when the government is stable, and policies remain unchanged over time. If the leaders undertake reforms, are careful about spending, and help industries grow, the economy can stay strong. People can expect to earn higher interest rates on their fixed deposits during times of political stability.
On the other hand, political unrest and frequent government leadership changes can harm overall economic stability. That could lead financial institutions to lower their fixed deposit interest rates.
Summing Up
Fixed deposit interest rates offered in 2024 will depend on several factors like the liquidity situation, credit growth environment, competition landscape, macroeconomic factors, and socio-political climate. Understanding these determinants can help you make informed FD investment decisions.