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Impact of Repo Rate on Fixed Deposit Interest Rates
Posted on Friday, May 24th, 2024 | By IndusInd Bank
Repo rate plays a crucial role in deciding the interest rates on loans and fixed deposits. The repo rate is the rate at which the Reserve Bank of India lends money to commercial banks to help them meet their liquidity requirements under its liquidity adjustment facility (LAF). RBI’s rate-setting committee, the Monetary Policy Committee (MPC), decides the repo rate based on various economic indicators and factors.
The current repo rate in India is 6.5%, and the panel which decides it meets bi-monthly to review it. RBI changes the repo rate to control inflation and to encourage savings. Thus, repo rate change directly impacts fixed deposit interest rates. You can calculate the interest on FDs using the FD interest rate calculator.
How does the repo rate impact fixed deposit interest rates?
Whenever there is a rise or cut in repo rates by the RBI’s Monetary Policy Committee (MPC), it directly impacts the lending and fixed deposit interest rates. Loan interest rates and fixed deposit interest rates offered by the bank can be interlinked as banks rely on their borrowings from RBI and the deposits (including fixed deposits) for their lending activities.
Repo rate is the rate of interest that commercial banks pay to the Reserve Bank of India on their borrowings. That means borrowing becomes expensive for commercial banks when the repo rate rises. A cut in the repo rate indicates that borrowing funds is cheaper for commercial banks. Consequently, the commercial banks and the financial institutions pass on their burden and benefits to their customers. That means a rise in repo rates increases the loan interest rate for customers whereas a cut in repo rates results in cheaper loan rates.
The comparison of repo rate vs FD rates follows a direct proportion. A rise in repo rates can result in rising fixed deposit interest rates, and a cut in repo rates can result in falling fixed deposit interest rates. You can compare fixed deposits based on the interest rates offered and the returns you can earn. The FD interest rate calculator can be a valuable tool for comparison.
The Reserve Bank of India changes repo rates based on panel reviews to help all financial institutions and banks manage their borrowing costs and liquidity. The banks and financial institutions also often adjust their lending rates and fixed deposit interest rates in response to changes in repo rates to maintain profitability and competitiveness in the market. With this, a new financial product named repo-linked FD has emerged in India.
Also Read: Tips for maximising returns on fixed deposits
What is repo-linked FD? Why are they gaining traction?
Repo-linked fixed deposits are also knowno as floating-rate fixed deposits. The interest rates of these FDs are linked to the current repo rate set by the Reserve Bank of India. This one-of-a-kind FD is gaining traction as it promotes transparency in interest determination and also improves the transmission of monetary policy. It is also attractive to depositors as they can benefit from a higher rate of interest on fixed deposits linked to repo rates. Depositors can use the FD rates calculator to compare the returns. Especially in the falling interest rate scenarios when repo-linked FDs look attractive for investors, it is important to compare various options using the FD rates calculator to make a rational decision.
Also Read: How to Calculate Fixed Deposit Returns: A Simple Guide
In conclusion, the rate at which banks and financial institutions borrow from the Reserve Bank of India has a directly impacts the fixed deposit interest rates. Aligning fixed deposit interest rates to the repo rates can help in the efficient transmission of monetary policy, help banks effectively manage their cost of borrowing, and maintain stability in the system.
Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.
