Recurring Deposits are a popular investment option in India. They are especially beneficial to those who want to save a fixed amount of money every month. However, their interest rates play an important role in the kind of returns one enjoys.
Recurring Deposit interest rates in India are influenced by various factors. These, combined, determine the returns on your investment. Hence, knowing about them is imperative. So, here is a list that covers such factors:
- Reserve Bank of India Policy
The RBI is the central bank of India and is responsible for setting the monetary policy of the country. The RBI regulates the interest rates offered by banks and other financial institutions in the country. This, in turn, affects the recurring deposit rates. When the RBI lowers its policy rates, banks tend to reduce their deposit rates, including recurring deposit rates. Conversely, when the RBI raises its policy rates, banks tend to increase their RD interest rates.
- Liquidity
The liquidity position of banks also plays a crucial role in determining deposit rates. When banks have excess funds and are looking to lend, they tend to offer higher deposit rates. This is done to attract more customers. However, when banks face a liquidity crunch, they reduce their RD rates. This helps them conserve their funds.
- Inflation
Inflation is the rate at which the general price level of goods and services in an economy is rising. When inflation is high, the purchasing power of money decreases. This affects the returns on recurring deposits. Banks factor in inflation while deciding on the Recurring Deposit rates they offer. If the inflation rate is high, banks tend to offer higher deposit rates to attract customers and offset the impact of inflation.
- Credit demand
When the credit demand is high, banks need to mobilise more deposits to meet the demand. In such situations, banks often offer higher deposit rates. Doing so allows them to attract more customers. However, when the credit demand is low, banks may reduce their Term Deposit rates to discourage deposits and utilise their funds elsewhere.
- Government policy
The government may introduce tax incentives to encourage savings or may increase the statutory liquidity ratio requirement for banks. Such factors affect the latter’s liquidity position. They can also have an impact on the deposit rates offered by banks and financial institutions.
- Competition
Competition among banks and financial institutions significantly influences RD rates in India. Banks compete to attract customers and mobilise deposits. When there is intense competition in the market, banks tend to offer higher deposit rates to lure customers away from their competitors. Hence, it is best to monitor the rates on different banks’ websites and Banking apps.
- Tenure
Longer tenures tend to attract higher interest rates than shorter tenures. This is because banks prefer to mobilise deposits for longer periods. It lets them manage their liquidity and credit requirements more effectively.