Have fixed deposit rates been affected by demonetization?

Yes, but investing in fixed deposit accounts is still one of the most viable financial options. A look at how things have changed post-November 2016.

The two big news events of the year 2016 were the election of Donald Trump as President of the United States, and India’s mammoth demonetisation exercise, both at the end of the year. While the former shocked the world, the latter captured global interest and criticism in the space of just a few days.

November 8, 2016 was a watershed day in the modern history of India. On this day, the Indian Government and the RBI announced that from the morning of the next day, the currency notes of Rs 1,000 and Rs 500 would be ‘demonetised’. This meant that these currencies would cease to be legal tender immediately.

As expected, there was a mad scramble to offload these old notes at the bank. Every house had these notes in terms of savings set aside, while black money hoarders had crores of Rupees squirreled away. When banks all over the country opened for business on November 10, 2016, they were met by serpentine queues of people wanting to deposit the old money notes and get the new Rs 2,000 notes. Since stocks of the new Rs 2,000 notes were limited, people could not get access to the money lying in their accounts. The situation soon became dire as people were forced to stand in line for hours and return empty handed on most days. Meanwhile, ATMs waited to be recalibrated to dispense the new Rs 2,000 and Rs 500 notes, and in many places, the Rs 100 notes still in circulation also began to face a shortage.

The mass media was awash with accounts of people fainting in queues, of families mourning those who committed suicide owing to a cash crunch, and of helpless citizens waving about the defunct notes. At the same time, theories began to emerge about an imminent fall in interest rates for home loans and other lending products.

In December 2016, the first news of a rate cut to arise out of the demonetisation fracas came about with the announcement that the country’s biggest nationalized lender was slashing fixed deposit rates by at least 1%. Soon, other banks followed suit and slashed rates on their FD accounts. It was anticipated that rates would be cut on lending since banks were now suddenly flush with money and had high liquidity. But the rate cuts on FD accounts came as a shock, especially since most Indians prefer to invest in fixed deposits to create future wealth.

Today, the best banks in India are offering fixed deposit rates in the range of 6.5% for FD accounts spanning 3 years to 10 years. Other banks’ rates are in the range of 7% to 7.85% for deposits ranging from 271 days to 366 days. On December 31, 2016, the Government announced that fixed deposit rates for senior citizen FD accounts would remain constant at 8%. These deposits may have tenures up to 10 years and a deposit value up to Rs 7.5 lakh.

Some banks have also slashed rates on bulk deposits, mostly created by small and mid-sized companies that wish to invest excess funds.

The question now is, should you still open a fixed deposit account, now that rates have dipped? The answer is YES.

Here are our reasons for recommending that you open a fixed deposit account and how it is still a financially viable option for you:

  • Keeping extra money at home is no longer feasible. The threat of sudden demonetization is all too real, and it is worth your while to invest the money in a fixed deposit than leave it at home where it is idle money.
  • Look for banks that offer upwards of 7% interest on fixed deposits. Every fixed deposit works on the power of compounding: the higher the amount of money deposited, the higher is the earning on it at maturity.
  • That the fixed deposit will grow over time is a given. The interest payable on it is constant for the tenure of the deposit – it is not influenced by market rate fluctuations. So the interest does not rise or fall while the deposit is still active. This factor also helps you predict by how much the deposit will grow by the time it matures so that you can plan how to use the money on maturity.

Featured Image Credits: Pixabay