The Reserve Bank of India’s Monetary Policy Committee (MPC) on Wednesday raised the repo rate by 25 basis points to 5.50%, But for people investing in fixed deposits (FDs), the rate hike could bring some good news.
For borrowers with floating-rate home and auto loans, the or a longer repayment period, depending on how banks pass on the hike.
For FD investors, however, the picture could be different. A higher repo rate can create room for banks to offer better rates on deposits, although the benefit may not be immediate or uniform across banks.
When interest rates rise, banks may look to attract more deposits by offering higher returns to savers. This can make FDs more attractive, particularly for people who prefer stable and predictable returns.
Aakash Bansal, Co-Founder & CEO, MIDASX, said a repo rate hike could make fixed deposits more appealing to conservative investors who want predictable returns and lower volatility.
“Higher deposit rates may encourage investors to rebalance a portion of their portfolios towards FDs, especially for short- to medium-term financial goals,” Bansal said.
However, Bansal cautioned that investors should not make decisions based only on the interest rate. Post-tax returns, inflation, liquidity needs and the overall mix of investments also need to be considered.
For investors who are close to their financial goals or have a low risk appetite, locking in an attractive FD rate can offer greater stability and visibility of returns, he added.
This is where depositors need to be a little careful.
The has raised the repo rate by 25 basis points, but that does not mean banks will automatically increase their FD rates by the same amount.
Adhil Shetty, CEO, BankBazaar, said the rate hike could keep FD rates firm and create some room for banks to reprice deposits upwards.
He noted that current 1-2 year FD rates for deposits below Rs 1 crore are around 6.3% to 7% across major private banks, while small finance banks are offering rates of up to 8.1%.
However, Shetty said, “The repo rate hike does not mean FD rates may rise by 25 basis points across the board. Deposit pricing will depend on individual banks’ funding requirements and competition.”
For savers, this makes the timing of investment important. Shetty advised depositors to focus on the rate available when they invest or renew an FD and check whether the tenure matches their liquidity requirements.
While depositors could benefit from better FD rates, there is a flip side. People who are already repaying floating-rate loans may have less money left over to invest.
Rajagopal Menon, Vice President, WazirX, said the repo rate hike could affect household investment capacity as higher loan repayments reduce disposable income.
He added that if banks raise deposit rates, FDs could become more attractive for households that still have surplus money to invest.
This means the impact of the RBI’s move will not be the same for everyone. A borrower with a large floating-rate home loan could face higher monthly costs, while a saver with surplus funds could benefit if banks increase deposit rates.
The rate hike could make FDs more attractive, but investors should not rush into locking in their money simply because rates may rise.
If you are considering an FD, compare rates offered by different banks and check the post-tax return. It is also important to choose a tenure based on when you are likely to need the money.
For those who already have an FD coming up for renewal, the new rate environment could offer an opportunity to reassess where to park the money.
The RBI’s rate hike, therefore, is not necessarily bad news for everyone. While borrowers may face higher costs, depositors could get a silver lining if banks respond by offering better FD rates.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)