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Who sets the fixed deposit rate in India?

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Who sets the fixed deposit rate in India

Every bank has the right to set the interest rates for the fixed deposits. This improves competition among the banks to attract customers. But RBI has the authority to control and monitor the limit of this interest rate.

RBI is the king of all banks

In our country Reserve Bank of India is the ruler of all Indian banks or we can say it is banker’s bank. RBI has the central monetary authority to maintain the price stability in the Indian economy. To have a stable and growing economy, RBI has the power to fix and change different interest rates in India as per the flow of funds.

Bird’s eye view for different interest rates:

Let’s have a look to the different interest rates meaning and its impact in Indian economy.

Cash reserve Ratio (CRR)

Sometimes, we wonder what happens to the money that we deposit in a particular bank.  Actually, this is used by the banks to earn money by lending it for house loan, personal loan etc. But banks do not have the right to use the entire amount we deposit in banks. They have to maintain a portion of the deposit as cash and rest can be lent or invested by the banks. Now, the minimum percentage of cash deposit required to maintain is determined by the RBI, which is known as the CRR.

Statutory Liquidity Ratio (SLR)

After keeping a portion of deposits with RBI as cash, Banks also required to maintain a small portion of deposit with them at the end of the day. It may be in the form of Gold, cash, government bond or other security. This portion of deposit is called SLR.

Repo Rate

When banks have any shortage of fund they can borrow from central bank with less percentage and lend money to costumer with higher rate of interest to get profit out of it. The rate of interest at which RBI lends money to commercial bank is known as REPO RATE. If repo rate increased by RBI then, to make profit, banks also increase the rate of interest which discourages the customer to borrow money from bank, leading to a shortage of money in economy and less liquidity. That’s how it controls over the inflation.

Reverse Repo Rate

This rate is nothing but the interest percentage given by RBI to the commercial bank for the amount RBI borrowed from banks. Increase in this interest rate encourages the commercial bank to deposit more funds to central bank. Which ultimately results, money is drawn out of commercial banks and it controls over the inflation.

Rates that Influence interest rates

Fixed deposit rate are linked to the rate of inflation.  It means when Indian economy is in high inflation, RBI adopts a tight monetary policy to regulate the credit available in our country. RBI hikes the repo rate in this situation.

To be safe and cash flow for long term, banks issue high interest rate for fixed deposit to attract various customers. At the other hand banks decrease the CRR. CRR cut brings more liquidity into the system and it has a long term impact on the interest rate on deposits.

That’s how repo rate and CRR have a great impact on the deposit rates and in the case of inflation.

Conclusion : Who sets the fixed deposit rate in India

As we see, all the interest rates are fully controlled by RBI. In case of increase in CRR and SLR, bank gets less power to lend loans. And increase of repo rate and reverse repo rate customer get less power to borrow the loan. That’s how the fund inflation is control by RBI in India.

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6 COMMENTS

  1. Great article! There are multiple parameters which affect the overall banking business and the customers. There is one question which hovers my mind, why do co-operative banks offer a higher interest rates on fix deposits compared to PSB or private banks? Are the CRR and SLR requirements different for co-operative banks? And during economic crises, why do co-operative banks pose a higher risk?

  2. Co-operative Banks also follow the RBI guidelines. All of the Banks have the right to fix their own interest rates. Co-operative banks will compromise on their profits to get more deposits. This can help to get more customers.

  3. A good article which gives an overview of all the different bank rates. As the article rights says, the RBI is solely responsible for finalizing fixed deposit rates even if the commercial banks propose their own rates. The CRR, SLR, repo rate and reverse repo rate are the RBI’s tools to keep the banking activities and rates in check and also for stabilizing the banking sector of India. All these rates also play a major role in stabilizing inflation, deflation and overall economic growth of India.

  4. Truly informative piece which describes the role of RBI .Through this one comes to know that it is RBI which sets all the norms regarding the loans and the monetary norms set by different banks.The CRR, SLR, repo rate and reverse repo rate are the RBI’s tools to keep the banking activities and rates in check and also for stabilizing the banking sector of India. Reading this article gives an insight over this.

  5. According to the article RBI is the controller of intrest rates of fixed deposits. So a question that comes is who controls the RBI? Is it only the governor of RBI or the ministry attached to finance too? Repo rates and reverse repo rates are not the same, so why does it have the same effect?

  6. Reserve Bank of India controls each and every bank in India to stabilize country’s economy. These rates fluctuate as per economy needs. There is no need to say that these rates also affect general public directly or indirectly. But, Co-operative banks grant more interest as compared to the other banks.

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