Interest rate on deposits

Fixed deposits are offered by banks as well as other institutions, and these entities determine the interest rate on their deposits. There are specific conditions related to the particular bank or institution that will impact the exact rates. For example, if the bank has a large amount of lending for the 1-2 year range then it might be willing to pay a slightly higher rate of interest for deposits for the same time maturity that matches the lending pattern.

In terms of other conditions, the state in the economy also impacts the interest rates that are fixed on the deposits. If the monetary conditions are tight, which means that there is less liquidity in the debt market then the banks will be willing to pay a higher sum of interest to raise money and in that case the fixed deposit rates will be high. On the other hand, when there is too much money floating around in the economy, it does not necessitate the banks to pay a higher interest to raise additional amounts of money. In this situation, the interest rates can be expected to be lower than when the conditions were tight.

Another important factor to impact deposit rates is the monetory action taken by the central bank. If there is a higher inflation or when the inflation is rising the central bank of the country might want to restrict the flow of money by the means of taking money out of the system and at the same time making funds costly for borrowing. In this situation, the bank has no other choice but to raise the deposit rates to get funds from depositors. The opposite situation would be seen when the inflation is low and the central bank wants to stimulate the economy by the means of cutting rates or having more funds in the banking system. This will lead to a fall in the deposit rates.