What Happens If There Is a Change in the Interest Rate While You Have an RD Account?

Recurring Deposits (RDs) are a preferred savings option due to their fixed returns and predictable nature. However, many wonder what happens if there is a change in the interest rate after they have opened an RD account. Here’s a detailed explanation to clarify this scenario.

Fixed vs. Floating Interest Rate in RDs

Most banks and financial institutions offer RDs with a fixed interest rate. When you open an RD account, the interest rate prevailing at that time is locked in for the entire tenure of your RD. However, the implications depend on the type of RD account you hold:

1. Fixed Interest RD Accounts:

   • The interest rate remains unchanged throughout the tenure of the RD, even if market rates fluctuate.

   • Your returns are calculated based on the rate that was applicable at the time of opening the account.

2. Floating Interest RD Accounts:

   • These are less common but may be offered by some financial institutions.

   • In this case, the interest rate on your RD is linked to market conditions and may vary during the RD tenure. The returns are recalculated based on the revised rates.

Scenario 1: Interest Rate Increases

If interest rates in the market increase after you open a fixed interest RD, you will continue to earn returns at the originally agreed rate. Unfortunately, this means you won’t benefit from the higher interest rates.

Example:

• You open an RD at a 6% interest rate for 5 years.

• After 1 year, the bank increases RD rates to 7%.

• Your RD will continue to earn at 6% for the entire 5-year term.

Scenario 2: Interest Rate Decreases

If market interest rates decrease, a fixed interest RD protects you from earning lower returns. Your RD will continue to offer the agreed rate, ensuring stability.

Example:

• You open an RD at a 6% interest rate for 3 years.

• Midway, the bank reduces RD rates to 5%.

• Your RD will still earn 6% until maturity.

Impact on New RD Accounts

While changes in interest rates don’t affect existing fixed-interest RDs, they do impact new RD accounts. If you plan to open a new RD during a period of fluctuating interest rates, it’s important to monitor the prevailing rates to lock in the most favorable returns.

What About Premature Closure?

If you decide to close your RD account prematurely and interest rates have risen, you won’t be eligible for the higher rates. Instead, you may incur a penalty, and the interest will be recalculated based on the bank's premature withdrawal rules.

How to Make the Most of Interest Rate Changes

• For Fixed RDs:

  • Consider laddering your RDs by opening multiple accounts with different tenures. This strategy ensures that you can reinvest at potentially higher rates as your shorter-term RDs mature.

• For Floating RDs:

  • If you opt for floating interest RDs, monitor market trends to understand how your returns may vary over time.

• Monitor Interest Rates Before Opening an RD:

  • If rates are expected to rise, consider delaying your RD investment to lock in higher rates.

  • If rates are falling, open an RD immediately to secure the current higher rates.

Conclusion

For most RDs, changes in interest rates will not impact your existing account since they are based on a fixed interest rate model. This stability is one of the primary benefits of RDs, as it shields you from market volatility. However, if you wish to benefit from rising rates, consider opening new RDs or exploring floating-rate options.

RDs remain an excellent choice for risk-averse individuals seeking predictable and secure returns, regardless of fluctuations in interest rates.