Fixed Deposit has been the most sought-after investment option among Indian investors for its capacity to produce a fair return in a risk-free manner. FD is the ideal investment tool for investors who are reluctant to face higher investment risks. Presently, the Fixed Deposit Interest Rate is on an upsurge. What are their possible impacts? Is it going to benefit investors, or is it likely to hurt the interest of investors? Let’s explore the key points in this regard.
Fixed Deposit Interest Rise is the synonym for a rising lending rate.
Especially for senior citizens living on the interest from Fixed Deposits, a rise in the fixed deposit interest rate seems to be an excellent proposal. However, it is the synonym for Banks and Non-Banking Financial corporations to raise the interest rates on their loans. In other words, the fixed deposit interest rate rises whenever the lending rate rises. Thus, there comes a sharp rise in the cost to avail loans. It is likely to damage the Economy as investors will feel less interested in investments as the rise in the lending rate will make it costlier for them to get the necessary finance. Eventually, it significantly downsizes their profit, making them turn away from further investments.
The rise in the Fixed Deposit Interest rate encourages investors to save more.
Reduction in the non-assured and High-risk investment tools
One upside of the rise in theFD Interest rates is that it stimulates the mass to save more. For this reason, banks and NBFCs float up special offers that entitle investors to earn higher interest on their Fixed Deposits. It pulls investors to invest more in the fixed deposit account that forms more capital in the hands of Banks and Non-Banking Finance companies to lend out to eligible applicants.
As investors are pulled to fixed Deposits with a rise in interest rate, there are possibilities for investors to go away from the market-linked investment tools that do not offer assured returns. It sounds sweet to the investor, but if major disinvestment happens from the market at once, the money market is likely to crash. It will compel investors to incur major losses from investments in market-linked investment tools. The percentage rise in the Fixed Deposit Interest Rates may not make up for the losses in the high-risk investment tools. As such, the overall investment portfolio is likely to reduce significantly.
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Banks and NBFCs offer higher interest rates to senior citizens.
Senior citizens can look forward to a higher interest rate on their fixed Deposits with Banks and Non-Banking Financial Companies. It implies these investors, who live mainly on their lifetime savings, will have more cash. It enables them to keep their corpus protected against Inflation. Better cash liquidity can bring significant improvements to the lifestyle of elderly citizens. Thus, from the viewpoint of senior citizens, a rise in the Fixed Deposit Interest rates is certainly a good move.
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The rise in the FD interest rate is an effective measure to cut Inflation.
Enhanced Income Tax Collection
Inflation is one of the major challenges to the Economy. It arises when there is a significant surplus of demand over supply. Inflation reduces the investment capacity of investors as the excess of demand over supply will make items costlier. Thus, they will hardly have money to put in a monthly income scheme to generate investible funds. In such consequences, the RBI instructs banks to enhance the fixed deposit interest rate that will pull away the excess money from the mass, consequently reducing demand. Subsequently, it results in a significant drop in the inflation rate, making items of daily use cheaper.
A rise in the FD Interest rates will fetch investor higher yields, eventually accelerating their income. That said, taxable income will rise, and more people will come within the tax-paying bracket. Returns as Fixed Deposit interest qualify for an income tax deduction. As the Fixed Deposit interest rate rises, investors will generate a higher yield, consequently producing chances for higher income tax collection. It implies that the State and the Central Government will have better cash flows that they will likely utilize in social development activities.
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Thus, a rise in the FD Interest rate is like a double-edged sword that can cause a cut either way. The advantages and disadvantages associated with the rise in fixed deposit interest rates are entirely relative, depending on the aspiration and profile of the investor.
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