Why Fixed Deposit Interest Rates In India Tend To Fluctuate?

Business

oi-Sunil

By Sunil Fernandes

Published: Wednesday, July 15, 2015, 8:55 [IST]

Interest rates in India, particularly on fixed deposits have always been volatile. In fact, as compared to other developed countries we witness interest rates being revised by banks on fixed deposits regularly. Interest rates in India depend directly or directly on a host of factors.

In India, the interest rate is almost directly controlled by the Reserve Bank of India (RBI). The country's central bank has what is called the Repo Rate. These rates are interest rates at which the RBI lends money to banks in the country. At the moment it is placed at 7.25 per cent. Any cut in these rates tends to being down borrowing costs for banks and they tend to cut interest rates on their bank deposits.

Therefore, interest rates tend to fluctuate accordingly. Another reason for fluctuation has got more to do with the bank's own asset liability mismatch, according to which they may lower or hike deposit rates. At times when credit off take is slow they may cut interest rates on deposits.

RBI and the Repo Rate

Let's go back to the biggest issue of RBI and control over repo rates, which largely leads to a hike or fall in deposit interest rates.

The RBI moves repo rates higher or lower based primarily on its comfort with inflation. At the moment the Reserve Bank of India has kept the repo rate at 7.25 per cent. June consumer price inflation is at 5.40 per cent.

If the RBI feels that CPI inflation may go steadily upwards it may hold repo rates steady. On the other hand if it feels that CPI inflation is falling it might cut the repo rates and banks may hence cut their deposit interest rates as well.

This is one reason why fixed deposit interest rates in India tend to fluctuate.

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Conclusion

As mentioned above, deposit interest rates depend on a number of factors. Inflation, RBI Repo Rate, Credit Off take and Bank's own asset liabilities match.

At the moment interest rates in India are headed lower and inflation is showing a declining trend. How far they will fall is difficult to say. In fact, bank deposits have seen interest rates fall from near 9.50 per cent, to the current levels of 8.50 per cent. They might continue to fall in the near term. Those looking to invest in fixed deposits can do so for a longer period, so as not to be worried of falling interest rates.

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