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Home Finance How Do Fixed Deposits Boost the Economy in India? Step by Step

How Do Fixed Deposits Boost the Economy in India? Step by Step

Fixed deposits have always been the safest investment option for ordinary people. The returns are guaranteed, which motivates the normal risk-averse individuals in India. Fixed deposits offer a delicate balance between interest gains and risks.

There are many additional benefits of investing in an FD account besides the interest earnings. Although FD instruments have a long-term commitment involved, the returns are satisfactory. It is higher than what is offered on a regular savings account.

Read on to know more about fixed deposits and how they boost the Indian economy.

A Quick Look Into Fixed Deposits

A fixed deposit is an investment instrument financial institutions offer to help people save money and earn interest on their principal amount. The interest earned on a fixed is higher than on a regular savings account.

However, there is an investment lock-in period involved. Therefore, cashing out funds before maturity is restricted and subject to financial penalties.

One can choose from different types of fixed deposit accounts based on their investment objectives.

Role of Fixed Deposits in Boosting the Indian Economy 

Fixed deposits are often marketed as a safe investment option with guaranteed results. It is ideal for most people who fear the bloodbath uncertainty of the stock markets and other volatile financial instruments.

People also open a fixed deposit account for different life goals such as higher education, marriage, retirement, etc. These life goals are crucial for people who are more determined to invest in an FD. 

Let’s deep dive and explore five ways in which fixed deposits boost the Indian economy.

Financial Inclusion 

A majority of the Indian population is risk-averse, and most people won’t put their hard-earned income into an investment that doesn’t offer guaranteed returns.

Thankfully, fixed deposits are designed for guaranteed returns.

It helps to overcome the financial inclusion challenges to a great extent because it’s relatively simple to open and invest in FD accounts. FDs have a more straightforward approach than a stock market that requires a DEMAT account and other technical know-how.    

Retirement Income 

FDs are broadly categorized into two types: cumulative FDs and non-cumulative FDs. The interest income from non-cumulative FDs is paid out to the investors regularly.

In India, most people work in the private sector and must consider their retirement plans. Therefore, it is a great way to fund your retirement without relying on external aid.

FDs Share in Total Deposits

You will be surprised to learn that fixed deposits significantly contribute to the total deposit base of banks.

As per RBI’s official data (2019), FD’s share in aggregate bank deposits stood at a massive 57.7%. This undoubtedly makes FD a major boost for the Indian economy. A high FD ratio can be linked with economic stability and long-term prosperity.

Increased FD investment also indicates that people have a higher disposable income which is a vital sign of economic growth.

FDs and Diversification 

Diversification of investment is crucial to growing funds in the long term. The absence of diversification in any investment portfolio can lead to high risks. Moreover, the chances of loss are higher when you don’t have a stable financial instrument in your pool.

FDs offer a great way to diversify a portfolio; therefore, most prudent investors invest a significant chunk of the total assets in an FD.

FD Interest Rates and The Economy 

An increase in the FD interest rate is a strong signal for the declining value of a country’s currency. An increase in the loan-to-deposit ratio is also linked with higher FD interest rates.

Therefore, when interest rates are high more people opt for secured investments like a fixed deposit as it can be your haven during economic turmoil.

To Wrap Up

A fixed deposit account is a great investment option for people who want guaranteed returns and would rather skip the risk associated with volatile instruments. Significant economic predictions can be based on investment in FDs by ordinary people.

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