The Reserve Bank of India has increased its key interest rate, known as the repo rate (RBI Repo Rate Hike). This rate was raised by 25 basis points, moving from 5.25% to 5.50%. While this will lead to an increase in monthly payments (EMI) for borrowers with home or auto loans, the rate hike will have the opposite effect on fixed deposit (FD) depositors.
There is an inverse impact of the repo rate on loans and deposits. Despite a potential increase in EMIs for home and auto loans, it is expected that individuals placing funds in fixed deposits will receive a higher interest rate in the future.
The main reason for this is that the rise in the repo rate makes borrowing more expensive for banks. In response, banks strive to attract deposits by offering customers higher interest rates on savings schemes such as FDs. However, the increase in the FD interest rate does not happen instantly but gradually, as banks take appropriate measures for their clients.
Unlike customers taking home or auto loans, depositors using FDs for savings may expect greater benefit from the repo rate hike. Thus, the repo rate hike can be considered good news for FD investors.
If a bank increases the interest rate on its FDs by 0.25% in line with the 25 basis point increase in the repo rate, new depositors will receive a higher percentage. It is important to note that for those who have already taken out an FD, the interest rate terms will not change; the new level will only apply when opening new FDs or renewing old ones.
By calculating the benefit, one can see that if a person places 10 lakh rupees in an FD for one year at a rate of 7.00%, the annual income will be 70,000 rupees. If the bank raises the rate by 0.25% to 7.25% due to the repo rate hike, the income on this deposit will increase to 72,500 rupees, providing an additional profit of 2,500 rupees.