If you are preparing for the IBPS exams it is very important to note that you must have a fine knowledge of the banking world. Banking awareness plays a key role in the IBPS exams and thus we are here with yet another module to help you improve your banking awareness.
IBPSExamAdda.org.in is here to give you the latest IBPS Banking awareness 2015 and also to provide you with IBPS banking awareness PDF material download. We hope you succeed in your endeavors as we seek to explain the reasons for rise and fall in bank deposit rates in this module. If you wish to know about various money market instruments then you must click here for the same.
Banking awareness: What are bank deposit rates?
Before telling you all about the reasons of fluctuations in the bank deposit rates, we would like to recapitulate what does the term mean. Bank deposit rates are basically the amount of interest that the bank or a financial institution pays to the person who has kept his/her cash with the bank or the institution. Banks also pay deposit rates on saving and various other accounts. The interest received may change from time to time, below are the reasons for the same.
Why do bank deposit rates rise or fall?
1. Element of risk:
Whenever there is lending of money involved, there is always a risk element present for the lender. The borrower may go bankrupt or may simply refuse from paying the money back. This element of risk is the key factor in rising and falling of deposit rates. Therefore, so that the lender is compensated properly, the deposit rates may change from time to time.
Inflation is a rise in prices of goods; it implies that you can now buy lesser goods with the same amount of money. Extreme inflation is not healthy for the economy and therefore when there is inflation, the bank deposit rates fall because the lenders tend to compensate themselves for the decrease in purchasing power of the money they have.
3. RBI intervention:
The Reserve Bank of India which is the central bank of our country has all the right to interfere in matters of deposit rates. The RBI uses monetary policies in order to control inflation and under these policies, sometimes, the bank deposit rate is increased so as to encourage people to deposit more money with the bank to decrease the money supply in the economy. Once money supply is decreased, purchasing power of people decreases which ultimately leads to lowering down of prices due to less demand. To know more about how RBI controls Inflation, click here.
4. Economy growth:
The government may want to slow down or speed up the economic growth of the country. When the government wishes to slow the economy down it increases the deposit rates so that people deposit more and spend less. However, when the government wants that the economy growth needs to be faster, the bank deposit rates are decreased so that people are encouraged to spend more which will ultimately cause a growth in the economy.
5. Demand of credit:
The falling and rising of deposit rates also depends upon the demand of credit in an economy. if there is a higher demand of credit in an economy then the deposit rates are likely to rise and if the demand for credit is lower, then the deposit rates are likely to fall.
We hope we were able to help you in this module about the forces behind falling and increasing bank deposit rates, keep reading for more banking awareness modules. All the best readers!