FD renewal risk: a 7% FD renewed at 6% or 5%

The rate is fixed, the next one is not

A fixed deposit guarantees its rate for its own term only. When it matures, you renew at whatever banks are offering that day. If rates have fallen, your effective return over the full period drops, even though nothing about the first deposit went wrong. This is reinvestment risk, and it is easy to miss because the first FD looked so certain.

Worked example: ₹1 lakh over ten years

Assume annual compounding and a 7% FD for the first five years. Everything below is plain arithmetic, rounded to the nearest rupee, and tax is ignored.

• After five years at 7%: ₹1,00,000 × 1.07⁵ = ₹1,40,255.

Now compare what that sum becomes over the next five years depending on the rate at renewal.

A one-point fall in the renewal rate costs about 4.6% of the final amount, and a two-point fall costs about 9%. The shortfall is bigger than a single year's interest on the original ₹1 lakh.

What the ten-year result really earned

The effective yearly rate over the whole decade is the figure to watch, not either deposit's headline.

• 7% then 6%: ₹1,87,693 over ten years is roughly 6.5% a year.
• 7% then 5%: ₹1,79,005 over ten years is roughly 6.0% a year.

So the "7% FD" was, in practice, a 6.0% to 6.5% decade once the renewal came due.

Why this matters more for large and late deposits

The same percentage gap costs more rupees on a bigger sum. On ₹50 lakh, the 6% renewal shortfall above is roughly ₹4.5 lakh. For a retiree living on FD interest, the problem is not just a lower final sum but a lower monthly income at renewal, at an age when other income may be limited. The cheap time to think about it is before the maturity date, not on it.

Ways to blunt it

• Stagger maturities. Split the money across deposits maturing in different years, as in how to build an FD ladder. Each rung renews at the rate of its own year, so you average rather than gamble.
• Lock a longer term when the rate is attractive. The trade-off is flexibility, because premature withdrawal usually cuts the rate and may add a penalty.
• Keep part in something that is not a fixed rate. A fund's return is not guaranteed, but it does not reset on a single date either.
• Decide before maturity. Many banks auto-renew at the then-current rate. Check the offer a few weeks ahead.

Run your own numbers

The FD calculator lets you enter a rate, term and compounding frequency; run it twice, once for each deposit, to see your own blended result. Interest on an FD is taxed at your slab each year, so the post-tax gap is a little smaller than the rupee figures above but the direction is the same.

The point is not that FDs are bad. It is that "locked at 7%" describes five years, not your retirement.