Fixed deposits (FDs) have long been preferred by risk-averse investors seeking assured returns. However, recent developments regarding the withdrawal of Rs 2000 notes have sparked discussions about the potential impact on FD interest rates. Experts suggest that the financial sector’s liquidity surplus could lead to a drop in interest rates, with various macroeconomic factors indicating a peak in the current cycle of interest rate hikes.
The deposit of Rs 2000 notes in banks has resulted in an excess of liquidity, with around 85 per cent of these notes being deposited rather than exchanged for smaller denominations. Assuming that some of the notes were already with banks in currency chests, it is expected that bank deposits may increase by at least Rs 2 lakh crore, according to a report by the State Bank of India (SBI).
According to a report by Livemint, this surge in liquidity further enhances the banks’ ability to accept deposits and influences the future trajectory of FD interest rates.
Vinit Khandare, founder and CEO, MyFundBazaar, predicts that if the financial sector continues to experience an excess of liquidity in the coming months, interest rates may decrease, particularly at the shorter end of the interest rate curve.
Professor Vijay Victor from T A Pai Management Institute points out that the withdrawal of Rs 2000 notes, coupled with improving inflationary conditions, are the main reasons behind the current muted FD rates, the portal added.
When banks face a high demand for loans but struggle to secure funds to meet this demand, they often raise interest rates on fixed deposits to attract investors. However, as banks start accepting returning Rs 2000 notes, their deposit base is expected to receive a significant boost.
As per Reserve Bank of India (RBI) Governor Shaktikanta Das, approximately Rs 1.8 lakh crore worth of Rs 2000 notes have already re-entered the banking system through deposits and exchanges. It is highly likely that a considerable portion of this money will remain with banks for over a year. If half of this amount remains with banks for an extended period, there will be no rush to raise interest rates on fixed deposits.
It may be a good idea to either stay invested in existing bank fixed deposits, which offer higher interest rates or consider fresh investments in FD schemes before any potential rate cuts occur.
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