One of the major determining factors for an investor to choose a bank to open his account in is the savings account interest rate. Investors find that if their money can grow while safely parked in an account, it is a lucrative deal. It is also important to choose a bank which offers a host of convenient facilities, while charging little or no fees on transactions along with high interest on savings accounts. But did you know that banks keep changing their interest rates because of certain factors, so the rate you’ve been offered today, could change anytime tomorrow. These are the factors which can affect bank interest rates.
The ever changing economy: The economic conditions of a country in general play a significant role, influencing the movement of the rates of interest. In a growing economy like India, people have good earning sources which also increase their purchasing power and their confidence to borrow money from banks and purchase the products they need. This is why home loans, car loans, consumer durable loans etc. are so popular. This increased demand for funds influences the rate of interest causing them to increase, whereas during recession these rates decrease significantly.
The role of the RBI: The Reserve Bank of India or RBI governs the country’s monetary policy. It also manages the monetary activities like supply, demand, liquidity and bank interest rates. This is controlled through key policy rates like repo and reverse repo rates and ratios like cash reserve ratio and statutory liquidity ratio. These key policy rates by the RBI serve as a major benchmark, influencing the interest rates offered by banks. The RBI keeps revisiting and readjusting these parameters from time to time, depending upon the country’s economic conditions.
The conditions of the stock market: Corporates, who are in need of funds on a daily basis, meet their needs either through equity expansions within the stock market or by borrowing money from financial institutions like banks. Certain trends within the stock market e.g. a bullish (upward) trend can prompt corporate organizations to consider the equity expansion route. This results in a reduction for funds being borrowed from banks. On the other hand, a sluggish (downward) trend can result in corporates going on a borrowing spree, thus increasing the demand for funds.
Inflation: Another significant factor governing the interest rates offered by banks and interest rates on loans is inflation. Lenders generally prefer to loan money at interest rates that are usually higher than the inflation rate, because if they don’t do so, they will post a negative growth as per absolute terms. As such, when inflation rises, the interest rates on loans are increased, where as those on bank savings interest rates are significantly reduced. In contrast, when the inflation rates drop, you can get lower interest rates and higher interest on your savings accounts.