How is Interest Rate Calculated on Fixed Deposit

Interest rate on fixed deposit  is decided by bank. If you give this answer of the question, "How is Interest Rate  Calculated on Fixed Deposit? Then it will be the short cut. Yes, it is true. Every bank's interest rate on fixed deposit has totally different. But there is still, it is between 8% to 9%. So, for finding its answer, we have to understand many things.

In simple words, interest rate on fixed deposit is calculated on the basis of demand and supply of money. Rate will decided where demand and supply of money will equal.

You are seeing in the above image. Demand and supply of money are the big powers which affect the rate of interest on fixed deposit. First of all learn this effect.

1. More supply than Demand of Money

When bank receives the money from customers as fixed deposit. It will collect in bank's accounting database. Bank also issue the money who demands the money in the form of loan. Same data is also in the database of banks. All banks including central banks have big brotherhood which you can see one example of ATM card which can be used in any bank. So, now, on this database, bank has seen that supply is more than demand of money. It means, bank will start to give less interest on supplied money in the form of fixed deposit.

For example, I have one fixed deposit of Rs. 1,00,000 in SBI Bank. Banks' demand of this Rs. 1,00,000 is just its 50%. If current year interest rate is 8%, next year bank will give me 4% only on fixed deposit. I will cry. No, I will need more 4%. Bank will laugh and say me you are so idiot. It is the science of finance. Bank will not pay me 4% more because If I will withdraw my fixed deposit, there are other customer is ready to make fixed deposit at 4% on fixed deposit because he need the money per month for personal budgeted expenses.There are lots of supply. So, following is the basic rule of fixing rate of interest on fixed deposit.

If supply of money is more than demand of money, interest on fixed deposit will decrease. 

2. More Demand than Supply of Money

If there is more demand than supply of money, bank will ready to give more interest on fixed deposit. For example, I have spare 5,00,000 which is using in my business and I earning only 10% on this money from my business after deducting all my annual actual expenses. State bank of India has advertised on Internet, Get 15% interest on fixed deposit. I will see this ads. I will happy. I stopped my business and I will supply money to bank in the form of fixed deposit for the greed of more 5% per year. Bank will also happy because all my money is consumed by borrowers of bank at 20% of interest on loan.

So, basic rule, we have learned from this.

If there is more demand of money than supply of money, interest rate on fixed deposit will increase. 

3. Factors of Demands of Money 

Now, we have to learn the logic behind the demand of money. Why people demand the money and how it can effect on the rate of fixed deposit.

a) Govt. Demand of money

Govt. makes the bridge, Govt. makes the school, hospital, park and other lots of social welfare projects. For this, Govt. takes the loan from banks. So, more Govt. will take loan, more high interest rate will get the depositors of banks.

b) Private Sector demand of money

In private sector, we can take the entrepreneur who gets the money from banks on loan for their business promotion and development. If you and me will become the business person, depositors of bank will become rich within one day. Because this is supply line. Control will always in the supply if there is big demand. For example, wikipedia has lots of good contents which is consumed by lots of people everyday. Due to this, wikipedia covers its cost from donation without ads. So, supplier of information (Wikipedia ) is rich from money point of views.

c) International Demand of Money 

If one country's value of currency will decrease, there will be more demand of money. For example, you send your child to America for doing BA in Accounting. Its cost is $10,000. In Indian currency, its cost is Rs. 6,55,000. If one dollar's value will equal to Rs. 100, it means, you need Rs 10,00,000 in your currency which is more than Rs. 345000 from previous demand which will you fulfill from bank by taking loan. This is the demand of money for bank. Its main factor is international currency rates. So, bank will happy to you the loan. But if all Indians will start to send their students to America, All the depositors will become richest person of world. But it is not sure, it will Indian because there is also depositors of USA who can save fixed deposit in Indian banks also. Every one dollar will become Rs. 100 and then big interest will give to them. So, USA will be win-win position.

4. Factors of Supply of Money

a) Supply from small saving

If there are lots of public who are interest to save their one rupee every month and then convert it in fixed deposit, it will increase the supply of money. Bank will not control it. So, bank has to decrease the interest rate. So, people will disappoint and reject to save the money in banks.

b) Supply from Spare Money

If you have the spare money, and you will surely save it in bank as fd for future security. It will also affect on the calculation of interest rate on fixed deposit. Every one rupee which will go to bank which is spare, will surely decrease the rate of interest on fixed deposit.

c) Supply of money due to fear

Yes, it is big factor. If there is big fear, people will save more. If there is the risk of loss of money in business, people will give more supply of money to bank. If there is uncertainty of source of per month income, people will save more money. For example, due disabled my Google adsense account, I felt uncertainty from the source of income, so, I converted all saving into fixed deposits for surviving accounting education. Like this, there may be lots of fear which will motivate anyone to supply money to bank. If these type of fear will increase more, we will earn less interest on fixed deposit. I think, its better solution is doing millions of business in one day.

d) Supply of money due to reward

Reward is great. I will shift my whole fixed deposit from one bank to other bank, if other bank will give me 20% more interest. This is the power of reward. No me, everyone will be affected from rewards. Due to giving rewards, if bank receives more money, it is sure, next time, interest rate on fixed deposit will decrease.

e) Compulsory Saving of Money

Sometime, company or govt. has to give pension to their employees. Due to this, there is compulsory saving of money. This will be also in fixed deposit. This money may be in millions of dollar. If bank will receive it, bank will become leader to decrease interest rate on fixed deposit. 


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Accounting Education: How is Interest Rate Calculated on Fixed Deposit
How is Interest Rate Calculated on Fixed Deposit
Accounting Education
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