People, especially senior citizens, who depend on interest income, have been forecasted to see difficult times in future owing to a decline in deposit rates. While deposits have already witnessed a debacle in the past few months owing the global meltdown, fixed deposit rates are expected to slither further down. The main reason behind this fall is the Reserve Bank of India’s decision to propagate easy money supply in the country. Many banks have thereby decided to cut down their interest rates by as much as 100 basis points. Such decisions are most likely to hamper the interests of people who depend on such income that is generated from the interests of these fixed deposits. As fixed deposits were earlier seen as pioneers in safe investments, offering highly assured and risk-free returns, the same cannot be said about them in recent times owing to their lackluster performance.
While these changes can also be attributed to the rise in the demand for money on a global scale, especially with respect to money that is being transmitted to India, there is a lot of scope for the ease of monetary policies within a period of the next few months. Also, with a fall and decline in the rate of inflation further encourages the Reserve Bank of India to further cut down on its existing rates of interest. It seems like banks have forget the main reason why people opt to save their hard-earned money in fixed deposits – to save. Investors, in the normal course, with the interest that is gained from their fixed deposit either withdraw it or choose to reinvest it in the same scheme. When they withdraw their interest from the fixed deposit scheme, then their interest will already be credited directly to their savings account as mentioned by the investor. However, if they choose to retain such an interest, then they have the added advantage of earning interest which will always be higher than the previous year’s rate of interest. Upon withdrawing their interest, they will be subjected to the same rate of interest as last year.
Before investing their funds in a fixed deposit, investors are advised to conduct extensive research on the interest rates offered by various banks. After conducting a comparative analysis on which bank offers a desirable interest rate, they also need to look for a tenure that best suits their needs. For instance, in some fixed deposits, they need to deposit their money for a period of 5 years while in some banks the tenure may be for 10 years. There can also be a lot of variation in the interest rates offered by different banks for different tenures or periods of deposits. The method of calculating the rate of interest can vary as some banks may calculate the rate of interest on a quarterly basis, half-yearly, annual or on the entire period of maturity. After conducting all these steps and placing their trust in the fixed deposit of such a bank, if interest rates come plummeting down in such a manner, it definitely gives the investors a few reasons to worry. From salaried people to the retired class, most of these investors depend on the interest obtained from fixed deposits to meet their day-to-day expenses. When there is a decline in interest rates in such a manner, it is best to not panic and think of alternate ways of investment. But however they are better avenues to raise funds rather signing up for personal loans, home loans etc. Although you may be disappointed with your faith in public sector or nationalized banks, they provide more safety, security and stability of investments than private banks. Hence, review your methodology of investments as other debt instruments like commercial papers and certificates of deposit may also prove to be better modes of investment.