How will fixed deposit interest rate rise affects stock market?

How will fixed deposit interest rate rise affects stock market?

Fixed deposits form a vital component of a well-balanced investment plan. However, when chalking out your financial strategy you might be a bit wary of the returns you get through an FD when compared to various stock investment options. Equations are changing though, as issuers today offer you generous fixed deposit interest rates. For instance, just a few months ago, the Bajaj Finance Fixed Deposit upped its FD interest rates to give you returns at rates as high as 9.10%.

Is there a correlation between FD interest rates and stock investments? Well, the answer isn’t simple, as the investment landscape is intertwined. However, owing to a ripple effect, one instrument can impact another and so, here are 2 ways that an increase in fixed deposit interest rates will impact your stock market investments.

More FD investments: preference for safer instruments

A prime reason for investing in stocks is the high-interest rate. However, this comes with high exposure to risk. If Fixed Deposit Interest Rates increase, then as an investor you have every reason to want to invest in fixed deposits rather than stocks. This is because when compared to the latter, FDs keep your finances in a safe environment.

Let’s say you invest Rs.1 lakh each in an FD and in stocks where the FD offers you 7.5% returns. Even though this may not seem very high, returns from an FD are assured, while the same can’t be said for stocks. Moreover, If your FD issuer pushes the interest rate to 9% from 7.5%, then it will make more sense for you to invest a greater amount in FDs and a smaller amount in stocks. Of course, the final distribution depends on your risk appetite and investment goals.

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Increase in repo rates results in poorer liquidity

There is another, more indirect way in which an increase in FD interest rates impacts the stock market. To understand this relationship, you need to step back and see how repo rates affect FD interest rates. When repo rates increase, financial institutions increase both their lending and deposit rates.

So, let’s assume that the hike in FD interest rates has come about due to an increase in repo rates. However as repo rates increase, lending rates increase as well. This means that you will be borrowing money from lenders at a higher cost. In such a situation, if debt costs more, you are left with a scant amount to invest. In such a scenario, it makes sense to invest in a low-risk instrument such as an FD rather than stocks.

Now that you have seen how an increase in FD interest rates will push investors towards safer instruments, look for a fixed deposit that gives you both generous returns and fool-proof security before you invest. Remember that you get both these key elements when you entrust your finances to the Bajaj Finance Fixed Deposit.

This fixed deposit offers new customers a rate of 8.75% when they take an FD for at least 36 months and gives senior citizens a rate of 9.10% for the same FD. Further, you get a 0.25% higher FD interest rate when you renew your deposit, which means that you could be earning at a 9% interest rate in no time at all. Here, you also enjoy top-class security as this FD carries ICRA’s MAAA rating and CRISIL’s FAAA rating.

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If you’re wondering how to calculate interest rate returns, look no further than the Bajaj Finance FD calculator. Simply fill in the variables and you will have your returns computed in an instant. The ease and convenience don’t end there as you need just Rs.25,000 to get started and can set up your investment in moments by filling this online application form.

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