Bank FD Rates – Which fixed deposit is better to invest in fixed or floating rate? Who will get more profit and why?
Bank FD Rates – After increasing the repo rate of Reserve Bank of India, many government and private banks have also increased the interest rates of FD. It is expected that in the coming time, floating rate fixed deposits will give more returns to the investors.
New Delhi. Most of the people in the country prefer to invest in such options, where their hard earned money is completely safe and they get decent returns over the stipulated period. In such a situation, the idea of investing money in fixed deposits comes first in their mind, because it gives more profit than the interest earned on the savings account of any bank in the fixed period and their money is also completely safe. If you are also planning to invest money in bank or post office fixed deposits, then let us tell you that FDs are also of two types.
There is no change in the interest rates during the tenure of investment in FD. Such fixed deposits are called fixed rates FDs. At the same time, in the second, the interest rates of fixed deposits linked to the policy rates of the Reserve Bank of India keep changing. Such fixed deposits are called floating rates FDs. Recently, floating rates FDs came into the limelight when the RBI increased the repo rate and many public and private banks also increased the interest rates of fixed deposits.
How is the future of floating rate FDs?
Fixed Deposits are second most preferred in the country after Gold. However, due to the low interest rates on FDs for the last few years, the trend of people was decreasing towards it, but now due to the increase in interest rates once again people are moving towards it. With the increase in the interest rates on the deposits of banks along with the increase in the repo rate, it is clear that in the coming times, investors will get more profits with safety on floating rate FDs.
How do interest rates on deposits change?
Whenever RBI changes the key rates, then the loan rates also change. At the same time, it has a minor effect on deposit rates. The rate at which RBI gives loans to banks is called repo rate. Repo rate is the main interest rate in the Indian economy. Whenever economic activities have to be encouraged, then RBI cuts the repo rate so that banks have enough cash to lend. At the same time, whenever the rate of inflation goes beyond the fixed limit of RBI and becomes a cause of concern, then the repo rate is increased. In simple words, with the change in the repo rate, the loan rates change faster than the deposit rates.
What are the reasons for increase in deposit rates?
Most banks want to keep loan rates as high as possible and deposit rates as low as possible. This increases the net interest margin of the banks. At the same time, the deposit rates also change due to the credit deposit ratio. If this ratio is less then banks can give more and more loans. At the same time, they become indifferent about deposits. In such a situation, some banks may keep rates low on both loans and deposits. On the other hand, if a bank has given more loans linked to the repo rate, then there is a higher expectation of increase in deposit rates due to increase in key rates.
What is the condition of inflation at present
At present, the rate of inflation remains above the RBI’s fixed limit of 6 percent. For this year, the central bank has projected the inflation rate to be 6.7 percent. In the last three months, the RBI has increased the repo rate by 1.4 percent in three times to control inflation. With this the repo rate has reached 5.4%. After this, most of the banks increased the interest rates on loans as well as deposits. The cash deposit ratio has also come down to 72 per cent as compared to March 2019.
Why will banks increase deposit rates?
Want to register growth in your loan book with a fall in CDR. At the same time, it is expected that the demand for loans will not decline. In such a competitive environment, it would not be wrong to expect that most of the banks will increase the loan rates along with the deposit rates. According to an RBI report released in March 2022, 61 per cent of loans of private banks and 33 per cent of public sector banks are linked to the repo rate. In such a situation, it can be expected that private sector banks will increase the deposit rates more.
Floating or fixed rate, which FD is better
In view of the increase in interest rates by banks, floating rate FDs will prove to be more profitable in the current times. However, this benefit will be available only as long as the banks are increasing the rates. As soon as the banks start cutting it, you will also start making losses. On the contrary, on fixed rate FD, banks fix interest rate in advance. You get the profit only on the basis of the interest rate fixed on the maturity of the FD. So, no matter how much interest rates increase between the maturity period, you will not get any benefit from it. Not all banks have provided the option of floating rate FDs yet.
What is the big advantage of floating rate FD
The first advantage is that with the increase in interest rates, you will get more profit. On the other hand, this increased profit can help you a lot in dealing with the rapidly rising inflation. If the expectations are considered true, then RBI will increase the policy rates again to control inflation. It is believed that by the end of this year, the repo rate will cross 6 percent. In such a situation, banks will also increase the deposit rates. So, for some time now, you are looking forward to getting higher returns on investment in fixed rate FDs.