In the first revision since May 2020, the Reserve Bank of India (RBI) on Wednesday upped the policy repo rate by 40 basis points to 4.40 per cent. The decision was taken in an unscheduled meeting of the Monetary Policy Committee and enforced with immediate effect. Repo rate is the interest rate at which short-term lending is done by RBI to banks. With the repo rate increase, interest rates on loans are expected to go up. On the other hand, it could be good news for investors looking for relatively risk-free fixed deposits for decent returns.
The value of FDs as investment options is set to go up. Revisions to the policy repo rate by the RBI impacts both the rates of bank lending and deposit. The actual changes in the rates depend on decisions from bank to bank.
Fixed deposits are safer investment options which give guaranteed return to customers. “Cost of deposits should be calculated using the latest interest rate/card rate payable on current and savings deposits and the term deposits of various maturities,” as per RBI’s guidelines.
“Cost of borrowings should be arrived at using the average rates at which funds were raised in the last one month preceding the date of review,” it adds.
With the repo rate increase, floating loans and new loans will become costlier. EMIs and interest rates will be unchanged for those who have already procured loans. On the FD front, when interest rates increase, the short-term and medium-term deposit rates are the first ones to see increase. Long-term deposit rates then follow the pattern. The increase in deposit rates to materialise into meaning for customers may take some time with banks having surplus liquidity as of now.
Furthermore, experts believe that more such repo rate hikes may be undertaken in the coming months, which will likely keep up the pattern of fixed deposits becoming more attractive investment options.
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