How The RBI Repo Rate Affects Fixed Deposit Interest Rates

  • Added:
    Apr 01, 2014
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    841
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How The RBI Repo Rate Affects Fixed Deposit Interest Rates Photo by Aishwarya Mahurkar

The latest piece of news making the rounds in the finance world is that the RBI has changed the money policy in the third quarter of the financial year 2013-2014. The Repo rate (short term lending rate) has been increased from 7.5% to 8%. Most business lenders cannot approve of this hike as select loans will in turn see a hike in their interest rates. Let’s try to understand these dynamics in detail.


Repo rate:  Meaning


This is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks in case of any shortfall of funds. A higher repo rate means that nationalized and private sector banks will be less keen to take any money from the RBI. Thus, it limits the availability of funds for the common man. How easily can you get a loan in today’s market? The repo rate will affect the interest rates and the simplicity of the process as well. The impact may not be direct for most readers who argue that there are several other factors in the mix. However, it won’t be a factor without any influence either.


Repo rate hike: Consequences


Obviously, this hike will increase the home loan rates and EMIs over a period of time. It may not affect all types of loans, but home loans will definitely get affected. This is a long term consideration for most banks though, as no bank has increased their lending rate as of now. In fact, investors can even anticipate lower fixed deposit interest rates . The rates, as banks apply it, is a function of demand and supply. This hike in the short term lending rate will deter several business owners, investors and all retail borrowers from borrowing money from a bank. Banks, in turn, won’t be in a position to pay off people who have invested in fixed deposits. Thus, the interest rates on term deposits should fall down.


How to use it to your advantage?


If you are planning to borrow in this economy, it can be a bit hazardous right now. The rate hike will affect all existing and new customers. But, in these uncertain times, fixed deposits are at its highest in terms of rates. The looming threat of elections and potential fall in FD rates can continue till banks have to step out of the current status-quo strategy and make decisions. If you have funds that you want to invest in debt instrument like fixed deposits, then this is the time. The chances are that these are the ideal fixed deposit schemes  that you will get in the upcoming future. So, make the most of it.

Author's Profile

An experienced writer on finance topics, the author articulates of investment choices such as fixed deposit interest rates & recurring deposit schemes. She writes about a variety of topics including the benefits of recurring & ideal fixed deposit schemes and how to make the right investment choice.


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