The loan rate has been curtailed with an outlook to stimulate the growth in financial system and provides a lifeline to the much troubled real estate sectors. Furthermore, there was clear demand from the Indian Finance Minister to lessen interest rates after a cut in SLR by the RBI in the previous month due to which banks achieved good liquidity position. The FD rate has been decreased to secure the margin spread of the banks. The curtailed home loan rate would have trim the bank's net margin, but a parallel decrease in fixed deposit rate would now contain the impact.

Revised interest rate on home loans and Fixed deposits
HOME LOAN RATES CHANGES

Fixed Deposits Rates after change

(For >1 yr tenure and amount

The Macroeconomic Reason for Interest Rate Cut

Defying high inflation, the GDP growth has come down to nearby 5.5 to 5.6% mark. There is a concern in the economy that GDP growth could fall below the psychological 5% limit. To subdue such scenario, the incentive of rate easement has been induced in the economy. There's anticipation that such action would bring the economic growth back into the right track.

Rate Cut and the Common Man

The common man would suffer severely assuming rate reduction in banks fixed deposit rate. The concrete benefit that a person gets while making a fixed deposit is the real rate of interest that it gets. With lowered FD rate now the inflation could easily beat the rate of savings.

Let's understand this with the help of an example,

Fixed deposit rate - (minus) Rate of Inflation= Real Rate of Interest, so:

Situation 1:

If, FD rate > Inflation --- then it implies saving in long term

Situation 2:

IF, FD rateIn reduced FD rate situation, a common man will divert the long-term savings to another asset class such as gold, which are highly liquid and has a good long term return record.

The reduction in home loan rate would help the common man to pay EMI with ease. Bad monsoon over a weak global financial situation had slowed the tempo of economy, but a lessened home loan interest rate and approaching festive season are anticipated to bring in some cheers in the face of common man.

Why to invest in FD and RD at this point?

The SBI and some other public sector banks have started a trend of lowering the interest rate in FD and very soon private banks would initiate the same move. For an investor, this is a very good time to start an RD or FD savings as the rates offered by some nationalized banks are still on the higher side. Since home loans and car loans have also observed interest rate correction in last few weeks, so it is getting significant for the banks to maintain the margin spread and avoid losses.

All the vital factors are indicating an interest rate reduction in FD in the coming days. FD is supposed to be one of the most secured and reliable saving instruments amongst other investment instruments. In current scenario, it is judicious for an investor to lock the fund in FD with an assured return of around 9.25-9.5% Pa. Obviously there is always a flexibility to move out of bank's FD/RD if the situation changes abruptly. It is a very good time to take advantage of FD investment before all the banks reduces the rate.

InvestmentYogi