Fixed deposit

Indian Economy glossary

Also called: FD, term deposit, Time deposits · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 7, Ch 8 "Banks and the Magic of Finance"; Class 12, Ch 3 "Money and Banking"

Meaning

A fixed deposit (FD) is money placed in a bank once, for a fixed period such as 3 to 5 years, at an agreed rate of interest. You can withdraw it early only by paying a penalty. It pays more interest than a savings account because you give up liquidity, which is quick access to your money. In exchange, the bank can lend that money for a longer time. Fixed deposits are time deposits. They are part of broad money (M3) but not of M1.

Example

Priya puts ₹1 lakh in a 3-year FD. It earns a higher rate than her savings account. If she breaks the FD after one year, the bank charges a penalty.

Don't confuse with

  • Demand deposits (savings and current account balances): the bank must pay these whenever the holder asks, and they count in M1. A fixed deposit is tied up until it matures.

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