The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has unanimously voted to maintain the key policy repo rate at 6.5%. The committee decided to keep the repo rate at its present level for the fifth consecutive time in a row. The rate was last changed in February 2023, when the MPC increased this rate by 25 basis points, to 6.50%.
Repo Rate’s connection with bank deposits
Today's announcement will have an impact on loans and bank deposit interest rates as the RBI gives loans to banks based on the repo rate decided by its MPC. This is the rate of interest that banks pay to the central bank when they borrow money. On 8 February 2023, the RBI raised the repo rate by 20 BPS points to 6.50%. It was done to keep inflation in check and deter banks from borrowing and also to manage systemic liquidity.
The relationship between the interest rates on bank fixed deposits and the repo rate is crystal clear. Bank FD interest rates rise in sync with the rise in the repo rate and also decrease when it falls. Stability in repo rate gives banks an elbow room to offer attractive rates to their customers.
Experts speak
Talking to Outlook Money Adhil Shetty, CEO, of Bankbazaar.com said, “The anticipation of the RBI maintaining the repo rate at 6.5 per cent in its monetary policy meeting has prompted some banks to already increase their FD rates. This continues the trend seen in the past, where risk-averse investors benefit by securing their funds in higher FD rates. This current pattern suggests that banks are aligning their FD rates with the changes in the policy rate.”
Agam Gupta, Executive Director of Share India FinCap, however, differed slightly and said, “The banks are unlikely to adjust the FD rates further because the RBI has maintained the current repo rate. Reportedly, a few banks have also begun to lower their FD rates in recent months.” But he agreed that “any increase in bank FD rates, though, cannot be ruled out.”
Bankbazaar’s Shetty said that since the repo rate has remained unchanged, FD rates would likely stay higher, offering investors the opportunity to secure their funds at elevated rates. “They might employ a laddering strategy, breaking their FDs into multiple amounts and tenures. This strategy aims to capitalize on varying interest rate fluctuations, allowing investors to earn higher interest rates when these rates change upwards,” he added.
Gupta, however, is of the view that the majority of banks are gradually implementing the practice of offering repo-linked interest rates, which allows investors to profit from favorable changes in repo rates. “Real returns often decrease when the repo rate rises. But if the repo rate stays the same, FDs might not generate larger yields,” Gupta said.
