Culturally, Asians are big savers, unlike Westerners. Small wonder fixed deposit interest rates are much talked about in our country. According to the Reserve Bank of India (RBI), fixed deposit is the instrument most favored by savers in the country, accounting for around 57% of the total household financial savings.
Besides, a survey conducted by the Economic Times in 2021 found that 56% of respondents preferred fixed deposits as their top investment choice, followed by mutual funds and real estate. Furthermore, various banks and financial institutions have reported a significant increase in their fixed deposit base over the years, indicating the popularity of this investment option among Indians.
Let us quickly understand why fixed deposits are so popular among Indians, the factors contributing to the rise, and the types of fixed deposits in India.
Understanding why Indians prefer to invest in fixed deposits
It is natural to question if the popularity of fixed deposits is due to a lack of awareness of other financial instruments such as stocks, equities, mutual funds, real estate, or crypto. However, that is not true. The popularity of fixed deposits among Indians could be owing to their simplicity. Here are some more reasons why fixed deposits are so popular:
- Guaranteed returns: Fixed deposits offer a fixed rate of return for the duration of the deposit. This provides investors with a sense of security and predictability.
- Low risk: Fixed deposits are low-risk investment options, as the principal amount is not subject to market fluctuations.
- Liquidity: One can easily liquate fixed deposits before maturity in any financial emergency. This makes them a preferred choice for investors who want to have access to their funds in the short term.
- Tax benefits: Few longer-term fixed deposits also offer tax benefits under Section 80C of the Income Tax Act. This makes them an attractive investment option for individuals seeking to save on taxes.
- Convenience: Opening a fixed deposit account is a simple process that can be done online or at a bank branch. This makes them a convenient investment option for individuals who do not have the time or resources to invest in more complex financial instruments.
Different types of FDs in India
Different types of fixed deposits (FDs) are available in India. The features and benefits of these FDs may vary from one financial institution to another. Here are some examples:
- Regular Fixed Deposit: This is the most common type of FD, where a fixed amount is deposited for a fixed tenure at a predetermined interest rate.
- Tax-saving Fixed Deposit: The FD allows individuals to save tax under Section 80C of the Income Tax Act, 1961. The investment made in this type of FD has a lock-in period of 5 years.
- Senior Citizen Fixed Deposit: This is exclusively for senior citizens (above 60 years of age) and offers higher interest rates compared to regular FDs.
- Flexi Fixed Deposit: This type of FD allows the depositor to withdraw the amount as required without penalty. The withdrawal amount should be in multiples of a pre-decided amount.
- Cumulative Fixed Deposit: The interest earned on this type of FD is reinvested in the FD, and the maturity value is paid at the end of the tenure.
- Non-Cumulative Fixed Deposit: In this FD, the interest is paid out to the depositor regularly, which can be monthly, quarterly, half-yearly, or annually.
- Corporate Fixed Deposit: Companies launch corporate FDs to raise funds for their business operations. The interest rates offered by corporate FDs are generally higher than bank FDs, but the risk associated with corporate FDs is also higher.
Factors influencing the FD interest rate
Here are some of the factors that can influence FD interest rates.
- Reserve Bank of India (RBI) policies: The RBI is responsible for setting monetary policies that impact interest rates. The central bank uses tools such as repo rate, reverse repo rate, and cash reserve ratio to manage inflation and maintain economic stability. Any change in these rates by the RBI can impact the FD interest rates.
- Inflation: Inflation is the rate at which the general price level of goods and services increases over time. Higher inflation rates usually lead to higher interest rates to compensate for the loss of purchasing power of the currency. Therefore, banks may increase FD interest rates to beat inflation.
- Liquidity: Liquidity refers to the availability of money in the economy. If there is a surplus of liquidity, banks may lower FD interest rates to encourage borrowing and investment. Conversely, if liquidity is low, banks may increase FD interest rates to attract deposits.
- Economic conditions: Economic conditions, such as economic growth, unemployment rate, and industrial production, can also influence FD interest rates. When the economy is performing well, banks may lower FD interest rates to stimulate growth. On the other hand, when the economy is sluggish, banks may increase FD interest rates to attract deposits and keep the economy stable.
- Competition: Competition among banks can also play a role in FD interest rates. Banks may increase or decrease FD interest rates to attract customers and gain a competitive advantage over other banks.
- Term of the FD: The duration of the fixed deposit can also impact the interest rate offered by banks. Typically, longer-duration FDs attract higher interest rates than shorter-duration FDs.
FD interest rates for Top 10 banks
Interest rates vary depending on the deposit amount, tenure, and other terms and conditions set by the banks. It’s essential to check with each bank for the latest FD interest rates and choose a deposit that best suits your financial goals and needs. Here are the fixed deposit interest rates offered by some of the leading banks in India for your perusal.
|Bank Name||Regular FD rates||Sr. Citizens|
|Bank of Baroda||6.75%||7.25%|
|Kotak Mahindra Bank||7.0%||7.5%|
|Punjab National Bank||6.8%||7.3%|
(FD interest rates for one year, data as of Feb/March 2023)
Guaranteed returns, low risk, tax benefits, and convenience make fixed deposits a preferred investment option for many Indians. Although fixed deposit savings schemes appear simple, investors should constantly evaluate the risks. One should consider if the FD returns are higher than the inflation rate. Additionally, if an investor withdraws funds from an FD before maturity, they may incur a penalty or receive a lower interest rate.