Floating Rate Fixed Deposit - Meaning, Advantages & Features

Get up to 9.40% p.a. interest, inclusive of additional benefit of 0.50% p.a. for senior citizens and 0.10% p.a. for women Open an FD

A floating rate FD is a savings tool for those looking to leverage rising interest rates. Unlike traditional FDs, the interest rate in a floating rate FD changes with market conditions. It is linked to the Reserve Bank of India's (RBI) repo rate. This type of FD could offer higher returns if interest rates rise. It may suit those who expect rates to go up and are comfortable with some risk.

How Does Floating Rate Fixed Deposit Work

When RBI’s repo rate increases, it becomes expensive for banks to borrow money from the central bank. To cover the higher borrowing costs, banks will raise the interest rates on floating-rate fixed deposits and lending products to encourage borrowing. This results in potentially higher returns for investors. This adjustment helps banks manage their expenses while providing attractive interest rates that reflect the current market conditions.

The table below shows how the interest rate and maturity value of a floating FD can vary with changes in the reference rate and margin spread.

Period	Reference Rates	Margin Spread	FD Interest Rates (p.a.)	Interest Earned on Principal	Maturity Value
Initial Deposit	4.5%	+1.5%	6.00%	-	₹10,000 (Principal)
1st Reset (6 Months)	4.5% (No changes)	+1.5%	6.00%	₹300	₹10,300
2nd Reset (Year 1)	5.0%	+1.5%	6.00%	-	₹10,300
Year 2	5.0% (No changes)	+1.5%	6.00%	₹674.50	₹10,974

Note: The reference rates and floating FD rates are for illustration only. Actual rates may vary by bank or NBFC.

Here is a breakdown of the illustration shown above:

Initial Setup: You start with ₹10,000, and the interest rate is 6.00% p.a.
First 6 Months: The reference rate remains unchanged, so you earn ₹300 in interest, bringing your total to ₹10,300
Next 6 Months: The reference rate increases, raising your interest rate to 6.5% p.a., but no interest is recalculated at the reset point
End of Year 2: You earn ₹674.50 in interest during the second year, making your final total ₹10,974

Advantages of Floating Rate Fixed Deposits

Floating rate FDs offer many benefits for investors seeking higher returns while keeping a low-risk profile. Here are the key advantages:

Interest Payout Cycle

They typically pay interest at the end of each quarter. Payments are usually made on the last day of the month.

Loan and Overdraft Facility

You can get a loan or overdraft against your floating fixed deposit. The loan amount is up to a certain percentage of your deposit. This gives you liquidity without breaking your FD.

Special Senior Citizen Rates

Senior citizens may get higher interest rates on floating rate FDs. The exact rate advantage varies among financial institutions.

Nomination Facility

Floating rate FDs allow depositors to nominate a beneficiary at no extra cost. This depends on the bank or NBFCs policies.

Quarterly Interest Rate Resets

Interest rates on floating rate FDs usually adjust every quarter. These resets typically occur on January 1, April 1, July 1, and October 1.

Link to RBI Treasury Bills

The returns on floating rate FDs are tied to the RBI's 91-day treasury bill auctions. The average yield is based on the results of the past three months’ auctions.

Potential for Higher Returns

Floating rate FDs can yield higher returns when market interest rates rise. This allows investors to benefit from favourable economic conditions.

Protection Against Inflation

As inflation impacts interest rates, floating rate FDs can offer higher returns. This helps your investment keep its value and provides a buffer against rising prices.

Comparison Between Floating Rate FD and Fixed Rate FD

When choosing a fixed deposit, you can pick between floating rate FDs and fixed rate FDs. Knowing the differences between them is important to make an informed decision based on your goals and risk appetite.

Feature	Floating Rate FDs	Regular FDs
Interest Rate	Variable, linked to a benchmark rate plus a margin	Fixed, remains the same throughout the investment tenure
Interest Rate Fluctuation	Adjusts periodically based on market conditions	No fluctuation; rate is locked in at the start
Potential Returns	Can increase if the benchmark rate rises	Fixed returns, predictable income
Risk Level	Moderate risk due to interest rate fluctuations	Low risk; returns are guaranteed
Inflation Protection	Potentially better protection against inflation	Limited protection, as the rate is fixed
Suitable For	Investors comfortable with some risk, anticipating rate hikes	Investors seeking stable, guaranteed returns
Early Withdrawal Penalties	Generally similar to fixed rate FDs but terms can vary	Penalties apply, usually with a fixed deduction
Market Dependency	Highly dependent on current and future market rates	Not dependent on market rates

Floating Rate FDs Offered by Banks and NBFCs

Here is a look at some banks and NBFCs available on Bajaj Markets that offer floating rate FDs and their respective interest rates:

Bank/NBFC	Interest Rate (p.a.)
YES Bank	8.35%

Note: The interest rate mentioned here is for deposits under ₹5 Crores. It is subject to change at the bank’s discretion.

Steps to Invest in Floating Rate FDs

Here are the steps to invest in a floating rate FD:

Research banks and NBFCs offering floating rate FDs
Select a bank or NBFC with good rates and terms
Decide how much you want to invest, ensuring it fits your financial plan
Choose the investment duration, keeping in mind that the interest rate may reset
Visit the bank or NBFC branch, or apply online
Fill out the application with required personal and financial details, including identity and address proof
Decide how you want the interest paid—monthly, quarterly, or at maturity
Deposit the investment amount via cheque, demand draft, or online transfer
Get the FD receipt or certificate with details like the interest rate, tenure, and maturity date
Keep track of the reference rate and any changes in the FD’s interest rate

Conclusion

Floating rate fixed deposits offer flexibility and the potential for higher returns, especially when interest rates are rising. Understanding how these FDs work, along with their benefits and risks, is key to making informed investment decisions that align with your financial goals.

Whether you aim to hedge against inflation, capitalise on favourable market conditions, or diversify your portfolio, a floating rate FD could be a valuable option. Assess your risk tolerance and financial needs before investing to ensure it supports your long-term financial health.

Other FD Related Pages
Fixed Deposit	FD Interest Rates	FD Calculator
Bajaj Finance FD Rates	PNB Housing Finance FD Rates	Mahindra Finance FD Rates
Bajaj Finance FD Calculator	PNB Housing Finance FD Calculator	Mahindra Finance FD Calculator
Corporate FD	FD Receipt	NRI FD
Senior Citizen Fixed Deposit	TDS on FD Interest	Premature Withdrawal of FD
OD against FD	Short Term FD	Nbfc FD Rates
Long Term FD	Types of Fixed Deposit	TDS on FD for Senior Citizens

What is floating rate and fixed rate FD?

A floating rate FD has an interest rate that changes over time based on a reference rate, such as the RBI’s repo rate. In contrast, a fixed rate FD offers a fixed interest rate for the entire tenure, providing predictable returns.

Which is a better floating FD or fixed interest rate?

The choice between a floating FD and a fixed rate FD depends on market conditions and your risk tolerance. Floating FDs can offer higher returns if interest rates rise but involve more risk. A fixed rate FD provides stability with guaranteed returns.

Why are floating interest rates higher than fixed deposit rates?

Floating interest rates can offer higher returns than fixed rate deposits because they adjust to current market conditions, potentially rising with economic changes. However, these rates can also decrease if the benchmark rate is lowered.

How is floating interest calculated on fixed deposits?

Floating rate FD interest is calculated based on benchmark rates, such as the RBI’s repo rate, plus a fixed margin. The rate is adjusted according to changes in the benchmark and is recalculated at each reset, typically on a periodic basis.

How often do the interest rates change in a floating rate FD?

The interest rate for a floating rate FD typically changes at regular intervals, which can be quarterly or annually, depending on the terms set by the bank or NBFC.

Can I take a loan against a floating rate FD?

Yes, you can take a loan against a floating rate FD, similar to a fixed rate FD. The loan amount is typically up to a certain percentage of your FD’s value, offering liquidity without breaking your FD.