How do Banks Calculate the FD Interest Rate?

While fixed deposits are regarded as the safest method for wealth generation, the FD interest rates offered are constantly changing. Despite FDs offering secured returns, these rates change quite often and across issuers. For example, the Kotak FD interest rates you get will be different than those offered by another issuer, and this variance matters. 

Additionally, some factors play key roles when determining FD interest rate revisions. A change in the repo rate is one such prominent factor, and it is governed by the RBI. A hike in repo rate by the RBI to meet rising inflation conditions will affect FD interest rates, leading to a hike. 

Another factor governing the FD interest rate is the issuer’s revenue generation and cash flow. When there is a higher demand for funds in the market, issuers are likely to revise their FD interest rates. These pointers offer a basic understanding of a few factors, and you ought to know all you can about the FD interest rates before you invest. 

To that end, here are a few pointers explaining how issuers calculate the FD interest rates offered to you.

Market Conditions and Economic Policy Rates

The prevailing market conditions combined with the RBI monetary policy are critical in affecting FD interest rates. The monetary policy is implemented to regulate the money flow in the economy. This policy also governs the borrowing and lending rates in the market. Therefore, variations in interest rates form a part of monetary policy regulations.

When there is high inflation, the RBI generally increases its repo rates to meet the changing market conditions. To meet these, RBI lends money to financial institutions at increased rates. The increased repo rate, in turn, prompts banks and other issuers to attract more depositors. 

This way, banks need not borrow money from the RBI at high repo rates. A hike in the repo rate helps in curbing inflation. Conversely, if the RBI wants to increase money circulation in the market, they decrease the repo rate.

Simply put, a rise in repo rates leads to an increase in FD interest rates, and a drop in repo rates forces the issuers to reduce the FD rate. A notable example of this principle in action is the current Kotak FD interest rates, which were hiked to 6.35% p.a. if you book an FD for 5 years or more. 

Age of the Investor

The age factor of the investor plays a prominent role, as the issuer sets the FD interest rate accordingly. In general, there are two main categories: non-senior citizen and senior citizen investor. As a senior citizen, you get an enhanced FD rate as compared to the rates offered to regular customers.

Typically, this hike ranges between 0.25% and 1% on the base interest rate, depending on the issuer’s policies. For example, the Kotak FD interest rates for a senior citizen are 6.87% p.a. for a tenure of 5 years or more.

Do note that you have to be at least 60 years of age to qualify for this benefit. As senior citizens are usually closer to retirement or have retired, this additional FD interest rate can offer generous returns. 

Tenor Opted for by the Investor

This is another vital element, as issuers generally reserve FD interest rates for longer tenor options. Typically, the investment timeline you choose does affect the rate you get, and there can be quite a notable variance between the rate for a short tenor and a long tenor. 

So, if the goal is to maximise earnings, a lengthier tenor is your best bet. For instance, the Bajaj Finance FD offers a high FD interest rate of up to 7.70% p.a. when you book an FD for a special tenure of 44 months. Similarly, if you are a senior citizen, you can enjoy up to 7.95% p.a. for the same tenure. 

Fixed Deposit Type

The final factor determining your FD interest rate is the type of deposit you choose. There are two FD types, cumulative and non-cumulative. If you choose the cumulative FD, you get earnings only at maturity and as a lump sum. 

On the contrary, with a non-cumulative FD, you can have your interest earnings paid to you at specific intervals. Your options are monthly, quarterly, half-yearly and annual payouts. Opting for a cumulative FD can help you earn a higher FD interest rate at maturity compared to a non-cumulative FD with a similar tenor. 

For instance, the Kotak FD interest rates for a cumulative FD goes up to 6.35% p.a. whereas it is up to 6.20% p.a. for a non-cumulative FD.

While it helps to know the FD interest rate, it is important to forecast your returns beforehand. An online FD calculator helps with planning and is easy to use. It can also help identify the best FD interest rate across various financial institutions.