Fixed Deposits are a known investment choice for investors seeking stability and assured returns. However, the interest rates offered on FDs are not fixed and can fluctuate over time. One significant factor influencing these fluctuations is the policies formulated by the RBI, the country's central banking institution. Let us explore how RBI policies impact FD interest rates:

Repo rate and reverse repo rate

The RBI sets the repo rate to lend money to commercial banks. When the RBI decreases the repo rate, banks can borrow money at a lower cost, encouraging them to lend more to consumers and stimulate economic growth. As a result, banks may lower their FD interest rates to attract borrowers. Conversely, when the RBI raises the repo rate to control inflation or stabilise the economy, banks may increase their FD rates to attract deposits and reduce lending.

Liquidity Adjustment Facility

The RBI uses the Liquidity Adjustment Facility to maintain short-term liquidity in the banking system. By conducting repo and reverse repo operations through LAF, the RBI influences the available funds in the market. Banks with excess liquidity may lower FD rates to discourage deposits and encourage lending. Conversely, banks with tight liquidity may raise FD rates to attract deposits and meet their funding requirements.

Open Market Operations

Open Market Operations involve the RBI buying and selling government securities into the open market. Through OMO, the RBI regulates liquidity and interest rates in the banking system. When the RBI sells government securities, it absorbs liquidity from the market, leading to higher interest rates. As a result, banks may increase FD rates to attract deposits.

Conversely, when the RBI purchases government securities, it injects liquidity into the market, leading to lower interest rates.

Monetary policy review

The RBI conducts periodic monetary policy reviews to assess the state of the economy and make decisions regarding key policy rates, such as the repo rate and reverse repo rate. These policy announcements significantly impact market expectations and investor sentiment. Positive changes in monetary policy, such as rate cuts, can lower Tax-Saving FD rates, while unfavourable changes, such as rate hikes, can raise them.

Inflation targeting

Controlling inflation is the RBI's primary objective. High inflation erodes the purchasing power of money and negatively affects the economy. The RBI may implement contractionary monetary policies like raising interest rates to deal with inflation. Higher interest rates can lead to higher FD rates as banks seek to attract deposits to restrict lending and reduce inflationary pressures.

Conclusion

The RBI decides the FD interest rates through its monetary policy tools and interventions in the financial markets. You can make the right financial decisions about FD investments by closely monitoring RBI policies and their impact on interest rates.