The Reserve Bank of India (RBI) increased the repo rate by 35 basis points, taking it to 6.25 percent. The latest move will make borrowing expensive, leading to higher equated monthly instalments (EMIs). However, the good news is that the interest rates on deposits like fixed deposit (FD) will see a rise.
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What happens to FDs when RBI hikes repo rate?
A relatively risk-free instrument, fixed deposit (FD) generally become attractive in higher interest rate regimes. For instance — in the last four policies, the central bank hiked the repo rate by 190 basis points and consequently deposit rates were increased by the banks.
Leading banks are now offering more than 7 percent interest on FDs of longer tenures.
Here are the fixed deposit rates offered by key banks:
| Name of Bank | For General Citizens (p.a.) | For Senior Citizens (p.a) |
| SBI | 3.00% to 6.10% | 3.50% to 6.90% |
| HDFC Bank | 3.00% to 6.25% | 3.50% to 7.10% |
| ICICI Bank | 3.00% to 6.60% | 3.50% to 6.95% |
| IDBI Bank | 3.00% to 6.25% | 3.50% to 7.00% |
| Kotak Mahindra Bank | 2.75% to 6.50% | 3.25% to 7.00% |
| RBL Bank | 3.25% to 7.25% | 3.75% to 7.75% |
| Punjab National Bank | 3.50% to 7.00% | 4.00% to 7.50% |
| Canara Bank | 3.25% to 7.00% | 3.25% to 7.50% |
| Axis Bank | 3.50% to 6.50% | 3.50% to 7.25% |
| Bank of Baroda | 3.00% to 5.65% | 3.50% to 6.65% |
| IDFC First Bank | 3.50% to 7.25% | 4.00% to 7.75% |
(Source: Bankbazaar)
Deposit rates are linked to the rate of inflation. Banks generally give positive returns to depositors.
So, what will happen to deposits now?
According to experts, the consecutive rate hikes have given further momentum to rising FD interest rates.
ALSO READ | Is it wise to switch to fixed interest home loan in wake of repo rate rise?
Will the impact be quick?
No. The rate of transmission is slower in FD rates. However, reduced liquidity may spur the increase in FD rates.
So, what should depositors do?
According to experts, consumers planning to park their surpluses in fixed deposits should stick to tenures of 1 to 2 years. As fixed deposit rates are expected to increase, consumers should avoid auto-renewal facility while booking their fixed deposits. This might allow them to renew their fixed deposits at higher interest rates.
However, for the next few months, laddering FDs would continue to be a good move.
Fixed deposit laddering is a process of spreading investment in FDs over multiple maturity tenures or maturity buckets, whereby investors hold the chance to earn a higher return and even address the liquidity needs.
ALSO READ | Home loan EMI may rise as RBI once again hikes repo rate — What should you do now?
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