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Why do FD Interest Rates Change Frequently

By   /  April 14, 2023  /  Comments Off on Why do FD Interest Rates Change Frequently

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In a Fixed Deposit, you deposit a large sum of money into your bank account for a set length of time at a predetermined rate of interest. You will receive the amount you invested plus compound interest at the conclusion of the fixed deposit period.

This FD interest rates changes frequently due to a number of factors such as repo rates, demand and supply, liquidity, etc. Here we will discuss in details about the factors which can affect the FD interest rate and what should we do in such situations.

Factors Affecting FD Interest Rates

  • Repo Rate Changes: Deposit rates are tied to the rate of inflation. Depositors should receive positive returns from banks. As a result, investors should keep an eye on the pace of inflation, which impacts loan rates.
  • Banks typically reduce interest rates as their fund expenses fall. If fixed deposit rates are high, a modification of base rates is less likely unless high-cost deposit rates are reduced.
  • Banks lower fixed deposit rates in the short term during periods of low credit demand, impacting loan yields and, as a result, their net interest margin (NIM).
  • Demand and supply conditions: When there is less demand for lending, banks frequently lower fixed deposit rates. Banks, on the other hand, raise fixed deposit rates when there is a great demand for credit.
  • Banks often decrease rates in anticipation of a reduction in lending rates.
  • Dropping call rates also indicate the level of liquidity in the market (banks borrow from the call market for their short-term needs.) If the call market lends at a lower rate, it affects retail deposit interest rates.
  • Prevalent Liquidity Situation: When liquidity is abundant, banks do not need to rely on retail fixed deposits to meet their demands, as opposed to when liquidity is scarce, and banks must rely on their own deposits.

Even if you have an FD in LIC, the LIC FD rates are bound to change because of the reasons that are mentioned above.

What to do When FD Rates Change?

When interest rates on fixed deposits rise, it affects all tenures. Long-term FDs experience a bigger increase in interest rates than short-term FDs.

  • At the moment, interest rates are fairly high. Given growing inflation, it is preferable to open a short-term fixed deposit account right now. Long-term FDs will help you benefit more once inflation has settled.
  • You can also ladder your FD by dividing a large deposit into smaller chunks with varied time intervals. This will allow you to gain periodic liquidity while taking advantage of interest rate volatility. This will provide investors with higher returns when they reinvest for a longer period of time.
  • When there is substantial volatility, the fixed deposit term should be short, and when interest rates on deposits are high, the fixed deposit tenure should be lengthy.
  • When inflation is high, it is not a smart idea to lock money up in debt instruments for an extended period of time.

When is the Right Period to Invest in an FD?

Be Careful of Taxable Income: The interest on a fixed deposit is fully taxable. If the interest income in a fiscal year exceeds the established limit of 40,000 (50,000 for senior persons), a 10% TDS is levied. Once you understand all of the tax policies, you can begin investing in a fixed deposit.

Making the Most of Laddering: FD interest rates fluctuate a lot. If you invest a larger sum for a longer period of time, the FD rates may alter and rise. To avoid having your investment amount locked at lower FD rates, you should invest in FDs with varying maturities. By laddering, you can reinvest your short-term FDs when interest rates rise. This also provides excellent liquidity and flexibility because your money is not locked up in a single fixed deposit.

Evaluate Your Existing Income: Before you begin a fixed deposit, you should evaluate your present income. For example, if the majority of your income is spent on bills and other expenses, you will need to save up the funds needed to invest. Instead of deducting the money you desire to invest directly, you should plan and set aside a portion of your investment each month. This way, you’ll have enough money for a fixed deposit without having to cut back on other expenses.

Extensive Market Research: It is always a good idea to invest in a fixed deposit after completing extensive market research. Keep an eye on the fixed-income interest rates given by different banks and NBFCs. You will then understand when interest rates are high and low. You should also keep in mind that NBFCs provide greater FD interest rates than banks.


It is never easy to estimate the changes in the market – that is why we have got to be prepared at any given time and during any given period. This makes us financially backed up and prepared for whatever is coming our way. Most importantly, know-how and where to invest on the go.

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