Fixed deposits have been a favourite investment choice for people. The ones who don’t want to take the extra risk and settle for a secured and guaranteed return. However, that does not mean that the returns on FDs are low by any means. They are competitive for what they offer, and if you, as an investor, consider the current market, the FDs will seem like the smart option with an increased interest Rate. Now, the question is, what makes the fixed deposit interest rate high? Let’s decode that. How does the FD interest rate operate? To understand how banks determine the FD interest rate, you first need to know the concept of repo rate. Now, the repo rate, or repurchase rate, is the rate of interest that the central bank of India, i.e. RBI, used to loan funds to commercial banks. When this interest rate is high, it becomes difficult for banks to acquire funds, and they increase the interest rate on FDs to get the necessary funds from the public. With an increased rate on the FDs, it prompts the investors to park their funds with the banks, and the financial institutions can utilize this fund to their advantage. When the repo rate increases, the flexi fixed deposit interest rate also increases and decreases when decreased. Now, if you consider the current scenario, you will see that the RBI, in recent months, has consistently raised the repo rate. As an investor, you can expect the banks to react and raise the FD interest rates. Having said that, it is not mandatory for banks to increase their fixed deposit interest rates. The reason being it can affect their bottom line, and this is the reason why you see FD rates differ across banks. Furthermore, here are some reasons behind the revision of the FD interest rate – Liquidity: When the liquidity is not enough, then banks increase the FD rates to fill that gap. The demand for credit: With an increasing credit demand, the FD rates also rise. Effect on NIM: A bank’s NIM or net interest margin also decides the deposit interest rate, and it shares a directly proportional relationship with the FD interest rate. This is an overview of how FD interest rate works and how banks determine it. Now, let’s understand what makes this one of the safest investment instruments. What makes FDs a safe investment option? RBI’s decision to make deposit insurance mandatory for all commercial banks is the reason why FDs are considered so secure. The Deposit Insurance and Credit Guarantee Corporation offer this insurance, which amounts to Rs.1 lakh. Now, this is applicable to both interest and principal amounts. Even if the bank where your FD is goes insolvent, your deposit will be protected. However, a point to note here is that this insurance is applicable for deposits up to Rs.1 lakh. If you have any deposit of more than Rs.1 lakh, you will not get coverage for the remaining amount. Moreover, if you have more than of FD in different branches of the same bank, you will also receive a total coverage of up to Rs.1 lakh. This is why FDs are considered a secure and safe investment option. But what more does it offer? Other advantages of investing in an FD Here are some more reasons to choose an FD over other investment instruments – · Flexibility Flexibility is an excellent strength of FDs. Here, you have the liberty to choose the tenure of the deposit as per your financial goals. On the other hand, you can withdraw the funds whenever you want by paying a minor penalty. · Can be handy as a collateral FDs are also a great collateral option if you need any funding and don’t want to liquidate your investment. Moreover, this being a secured loan, the interest rate remains low. · Tax saving instrument The tax saver FDs are a great way to earn deductions on income tax. However, the deposit here is locked for 5 years, and you cannot break it. Wrapping it up Fixed deposit interest rate, even though it does not change as per the market’s fluctuations, it still alters periodically. As a prospective investor, you need to keep an eye out for the movement of the repo rate and then plan your investments accordingly to ensure the best possible return.