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@dancer12 This doesn’t make sense. Bank liabilities (mainly deposits) are short term and assets (loans given out by them) are long term. This practice is called maturity transformation. I think your point about getting to balance the cash flows isn’t correct. FD interest rates are based on...

@mommykoko I said “for example” and cited one example. I never assumed that only depositors who invest for 35 months are prone to withdraw early! The same logic applies for 390 days also. Banks don’t need to assume that it is a vulnerable period. There’s no magic number. If they make the special...

@mommykoko Banks neither hope nor assume that most depositors would stay for the full term, especially in the case of long-term deposits. For example, HDFC Bank is currently offering an interest rate of 7.15% on deposits of exactly 35 months. If you make a deposit of even one day more or less...

@mommykoko By keeping the interest rates high only for certain very specific time periods and lower for all the remaining terms, banks are able to ensure that they pay low interest to those who are making unforeseen (premature) withdrawals. Those specific terms with higher rates are to attract...

@medengconfused If you say it’s growing at a CAGR of 5% (12% - 7%), you’d get a crude approximation. If you want a precise value, you should say it’s growing at 4.67% ((1 + 12%)/(1 + 7%) - 1). In general, the formula is [ (1 + growth rate)/(1 + inflation rate) - 1 ]