Sunday, December 10, 2023

    Explainer: Which FD is better to invest in fixed or floating rate? Who will gain more and why?


    Fixed deposits are second most preferred in the country after gold.
    Due to the low interest rates on FDs over the past few years, people’s inclination towards FDs was decreasing.
    In future, investors will get more returns with the security of floating rate FDs.

    New Delhi. Most of the people of the country prefer to invest in such options, where their hard earned money is completely safe and they also get decent income within the stipulated period. In such a situation, the thought of investing money in fixed deposits first comes to their mind. In this, the interest earned in any bank savings account over a period of time gives more profit and the money is also safe. If you plan to invest money in bank or post office fixed deposits, then we tell you that FDs are also of two types.

    There is no change in interest rate during the investment period in FD. This type of fixed deposit is called Fixed Rate FD. On the other hand, fixed deposit interest rates are linked to the Reserve Bank of India’s policy rate. This type of fixed deposit is called floating rate FD. Floating rate FDs came into the limelight recently when the RBI hiked the repo rate and many public and private banks also hiked interest rates on fixed deposits.

    What is the future of floating rate FD?

    Fixed deposits are second most preferred in the country after gold. However, since the last few years people’s inclination towards FDs was decreasing due to low interest rates, but now due to increase in interest rates people are turning towards it again. With banks increasing interest rates on deposits, it is clear that in the future, investors will get more profit with the protection of floating rate FDs.

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    How do interest rates on deposits change?

    Whenever RBI changes the key rate, the lending rate also changes. At the same time, it has a small effect on deposit rates. The rate at which RBI lends to banks is called repo rate. Repo rate is the main interest rate in the Indian economy. Whenever there is a need to stimulate economic activity, the RBI lowers the repo rate so that banks have enough cash to lend. At the same time, the repo rate is hiked whenever the rate of inflation goes beyond the RBI’s prescribed range, which becomes a cause for concern. Simply put, with repo rate changes, loan rates change faster than deposit rates.

    What are the reasons for the increase in deposit rates?

    Most banks want to keep loan rates high and deposit rates low. This increases the net interest margin of the banks. At the same time, the deposit rate also varies due to the credit deposit ratio. If this ratio is low, banks can give more loans. At the same time they become indifferent about deposits. In such a situation, some banks may keep interest on loans and deposits low. On the other hand, if a bank lends more linked to the repo rate, there is a higher expectation of an increase in the deposit rate due to an increase in the key rate.

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    What is the current inflation rate?

    Currently, the inflation rate is above RBI’s target of 6 percent. The central bank has forecast inflation at 6.7 percent for the current year. The RBI has increased the repo rate by 1.4 percent three times in the last three months to control inflation. With this, the repo rate reached 5.4%. Then most banks increase the interest rate on deposits as well as loans. The cash deposit ratio has also come down to 72 percent as compared to March 2019.

    Why will banks increase deposit rates?

    Banks want to register growth in their loan books as CDRs fall. At the same time, the banks are hoping that the demand for loans will not decrease. In such a competitive environment, it would not be wrong to expect most banks to raise deposit rates as well as lending rates. According to an RBI report released in March 2022, 61 percent of private banks’ loans and 33 percent of government banks’ loans are linked to the repo rate. In such a situation, the private sector banks are expected to increase the deposit rates further.

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    Floating or fixed rate, which FD is better

    Given the rise in interest rates by banks, floating rate FDs will prove more profitable at present. But this benefit will be available as long as the banks are increasing the rates. As soon as the banks start cutting it, you will also start making losses. In contrast, in fixed rate FDs, banks decide the interest rate upfront. You will get profit only on the basis of fixed interest rate on maturity of FD. So, no matter how much the interest rate rises between maturity, you will not get any benefit from it. Not all banks offer floating rate FD option yet.

    What are the major advantages of floating rate FDs?

    The first advantage is that you get more profit as interest rates rise. On the other hand, this increased profit can help you a lot to cope with the rapidly increasing inflation. If the expectations are held true, the RBI will raise the policy rate again to control inflation. It is expected that the repo rate will cross 6 percent by the end of this year. In this situation, the banks will also increase the deposit rate. So, for some time, you look forward to higher returns on investments in floating rate FDs.

    Tag: Bank FD, Bank interest rates, make money, fixed deposit, Investment Tips, Money Making Tips, RBI

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