For decades now, Indians have continued to believe that creating a fixed deposit is a good investment for the future. When it comes to any type of investment, most Indians are averse to playing the markets or taking any kind of unsubstantiated risk. There is always the fear of losing one’s hard-earned money to speculative investment options. However, a fixed deposit is the perfect antidote to this fear – it is one of the safest, most dependable investment options in India.

A quick look at fixed deposits

For the uninitiated, here’s a brief primer on fixed deposits: it is a sum of money that you deposit with your bank, at a certain rate of interest, for a certain period of time. The FD interest rate remains constant throughout the tenure of the deposit. Thus, it is possible to estimate by how much the deposit will grow at the end of its tenure. Also, the fixed deposit rate is unaffected by market rate fluctuations, so it is a safe investment in any economic climate.

Apart from individual personal fixed deposits, it is possible to open company FDs also. The rates for the latter may be determined by your bank from time to time.

And now, on to understanding the interest rates

For long now, Indians have reposed their faith in fixed deposits because they offer good returns with low risk and stable capital appreciation. There is hardly an occasion for the fixed deposit to lose money, unless the bank abruptly closes down – this is an unfounded fear for nationalised banks and major private banks in the country.

Thus, fixed deposits are extremely useful investment options for all investors. And what determines their growth is the interest rate being offered by the bank.

Fixed deposit rates may change from time to time, but they are normally higher than the interest rate offered on savings accounts. Thus, instead of making your surplus funds lie in the savings account, it is better to create a fixed deposit account to get more earnings on the money.

Fixed deposit rates may change subject to certain conditions, such as:

* When a major economic decision is announced by the Government.

A case in point is the demonetisation of Rs 1,000 and Rs 500 currency notes as announced by the Indian Government on November 8, 2016. With every person rushing to deposit their defunct notes in these currencies in their bank accounts, the banking institutions across the nation suddenly became flush with funds. Since banks needed to borrow less money from the RBI during this period, they could afford to reduce the interest rates on fixed deposits. Thus, the rates were dropped to about 6% by major banks. On December 31, 2016, the Prime Minister announced that fixed deposit rates for senior citizen deposits would be 8%. Premier banks like IDFC Bank offer fixed deposit account rates at 7.5% for 366 days or 7.25% to 7.2% for terms up to 10 years.

* High inflation.

Rising inflation can trigger higher interest rates.  Financial advisors and bankers normally advise their customers to create fixed deposits when inflation is climbing, or when it is at an all-time high. This is because when buying becomes expensive, there is a demand for higher liquidity in the market. Thus, banks respond by creating higher liquidity with higher FD interest rates.

Reduced repo rate.

The repo rate is the rate at which the RBI (Reserve Bank of India) lends money to the banks in the country. Based on market conditions and how much money is circulating in the system, the RBI periodically cuts the repo rate by a few basis points. This happens when the economy is in a better shape than in the previous year. Consequently, the FD interest rate might increase. On the other hand, the RBI might increase the repo rate to control the credit available for banks’ use. In this case, the interest rate might decrease.

Drop in CRR.

The CRR, or Cash Reserve Ratio (CRR) is the amount of money commercial banks can deposit with the RBI. When the RBI cuts the CRR rate, there is more credit available and banks may reduce FD interest rates.

Fund cost fall.

Banks may reduce FD interest rates when their fund costs drop, so that they may uniformly revise base rates.

The fixed deposit interest math

As mentioned earlier, the fixed deposit growth is predictable because the offered interest rate is stable throughout the tenure of the deposit. Banks do not decrease or increase interest rates for existing deposits – any changes are reflected in new deposit accounts being opened at the time of change in interest rates.

Naturally, the longer you stay invested in the fixed deposit, the more the corpus grows. Also, the power of compounding comes into play to increase the size of the deposit. This means that the higher the initial sum invested, the higher is the growth on it over time.

You can use the fixed deposit money to finance major financial goals, such as making a down payment on a new house, buying a new car, paying for children’s education or wedding, creating savings for retirement, etc. You can stay invested for a period of 10 years, and if you require money in an emergency, it is possible to liquidate the deposit as well.

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