Skip to main content

Why Bank Deposit Rates Change

Best SIP Funds to Invest Online 


Over the past 1 year, small savings rates have come down. Many banks have also lowered their deposit rates. This has had an impact on households that rely on these, either for regular income or for long-term savings.


The Public Provident Fund (PPF) was at 8.7% in FY15. Currently, it is at 7.6%. Similarly, State Bank of India's 1-year fixed deposit rate was 8% in 2015. It is now 6.25%. Ever wondered why this happens? Here are some factors that impact the rate at which your savings grow each year.


RBI repo rate
Repo is a transaction where the Reserve Bank of India (RBI) buys back or repurchases (hence, repo) securities lent to banks at a fixed price. The price for each security is affected by the repo rate. The transaction is relevant for banks when they need funds from the RBI. This is like the central bank lending money to banks at the pre-determined repo rate. As most monetary transactions in an organised economy get routed through banks, a change in the repo rate eventually impacts all saving and lending action.


A high repo rate means that banks borrow funds from the RBI at a relatively higher rate. As cost of funds increases, it gets passed on to companies and savers like you, in the form of higher lending rates. In tandem, deposit rates by banks also increase to keep customers interested; banks need deposits to keep on lending.


Similarly, the government offers deposits to individuals in the form of small savings certificates such as Kisan Vikas Patra and PPF. The government can afford to pay an interest on these due to earnings from sources like repo rate (banks pay the government an interest at the repo rate for funds borrowed). As the repo rate shrinks, the government's earnings and its ability to service the savings schemes also shrinks. Thus, with lower repo rate over a period of time, small savings rate too is likely to come down.


Inflation, growth
The RBI uses repo rate as one of the ways to check money supply in the economy, and manage inflation and growth. As bank lending and deposit rates impact corporate investments and individual savings, changes are critical to overall economic growth. Usually, high growth is followed by high inflation, and vice versa.


Inflation is essentially the rate of change in prices of goods and services. When it is high, the value of your money decreases fast, and this is compensated a bit by higher interest rates in the economy. When inflation is low, the value of your money is better preserved and falling rates don't really have a bad impact.


What you have to measure is the real rate of return, which is the offered interest rate less inflation. Today, at an inflation rate of about 4.5% per annum, your real rate of return for an interest rate of 6.5% is 2%. In 2014, when bank deposit rates were at 8-8.5%, inflation index was also at 7.5-8%. So the real return was relatively lower.


Another factor is government earnings from other sources like taxes. If these earnings are affected, which happens when the overall economic growth slows down, there could be a need to bring down interest costs for the government. This too can lead to a cut in small savings rate.



SIPs are when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich

For further information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com

Popular posts from this blog

Debt Mutual Fund Dividends are Taxable

DDT is deducted when a non-equity fund declares dividends. Equity and balanced fund dividends are tax-free The AMC is correct to deduct the dividend distribution tax (DDT) as it is mandated by tax laws. DDT in mutual funds is deducted every time a non-equity fund declares dividends. Equity fund and balanced fund dividends are tax-free . It is possible that you have invested in a non-equity fund for the first time or have received the dividend under a non-equity fund for the first time. That is why this is the first occasion when you have come across DDT.   The rate at which non-equity schemes deduct DDT has also gone up after the July 2014 budget. This is due to a change in calculation methodology. Earlier, if the fund has to declare a dividend of R 100, it used to make a provision for R 128.3, paying R 28.3 to the taxman and distributing the balance to the investor. This allowed the investor to bear less tax since the effective tax rate was 22.07 per ce...

Franklin India High Growth Companies Fund

Franklin India High Growth Companies Fund Online One of the key developments that the Street is keenly waiting for is a cut in interest rates by Reserve Bank of India . With demand rising gradually, a rate cut is expected to boost earnings growth for companies. In such a situation, schemes which invest in high growth companies are best suited, especially when seen from a long-term perspective. One such scheme is Franklin India High Growth Companies Fund. Fund managers Anand Radhakrishnan, Roshi Jain and Srikesh Nair strictly follow valuation parameters when it comes to choosing stocks.Valuation parameters, such as enterprise value, price-to-earnings growth ratio, forward price-to-sales ratio and discounted earnings per share, play a critical role in selecting companies for investments. Taking into account these parameters, the fund managers invest in companies which are poised for high growth in their respective sectors. This approach has been in favour of the scheme and it has perform...

Atal Pension Yojana contribution Tax Benefit for spouse

Contributions to Atal Pension Yojana (APY) are eligible for the same tax benefits as the NPS. This means that the contributions can be claimed under Section 80CCD (1B). The current limit for Section 80CCD (1B) is   Rs   50,000, over and above the   Rs   1.5 lakh limit under Section 80C. Section 80 CCD (1) is a different one, meant to cover employers' contribution towards NPS . You cannot get tax benefit by investing in the name of your spouse under Section 80 CCD . ------------------------------ ----------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saver Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in India for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Religare Tax Plan 4. DSP BlackRock Tax Saver Fund 5. Franklin India TaxShield 6. ICICI Prudential Long Term Equity Fund 7. IDFC Tax Advantage (ELSS) Fund 8. Birla Sun Life Tax Relief 96 9. ...

Avoid NFOs

  Don't get taken in by the flurry of new fund offers. You will be better off sticking to the tried and tested schemes.   For the past one year, to cash in on the bull run in equities, mutual fund houses have gone on a new fund offer (NFO) overdrive. But experts are unanimous in their advice: avoid NFOs . While past performance is not an indicator of how a fund will fare in the future, it does tell the investor how skilful the fund manager is. This crucial information is missing in an NFO. Not only is there no track record to judge an NFO by, many NFOs are similar to funds that already exist. If the new fund is similar to existing funds, you are better off investing in the latter. Around 67% of the new launches in 2014 were closed-end products. Investing in the NFO of a closed-end fund is doubly risky. In case the fund's performance is lacklustre, a closed-end fund does not allow you to exit. Even though closed-end funds are listed on the stock...

Mutual Fund Exit Load Changes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Mutual Fund Exit Load Changes AMCs don't communicate about any change in exit load directly with investors, but do update on their website   The exit load applicable to your investments is the load which existed at the time when you invested in the particular fund. Any subsequent changes in the exit load will not be applicable to your investments.   However, Asset Management Companies ( AMCs ) periodically publish addendums in the newspapers, which state any change in exit loads of specific schemes managed by them. Such changes are also posted on their websites. However, a direct communication to an investor is not made, considering the costs involved in doing so. In their own interests, investors should not only track the performance of the funds they i...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now