The Reserve Bank of India increased the repo rate by 50 basis points, taking it to 5.9 percent. The latest move will make borrowing expensive, leading to an increase in loan tenure and higher equated monthly instalments (EMIs). However, the good news is that the interest rates on deposits like fixed deposit (FD) will see a rise.
It is clear that FD interest rates are slated to hit 8 percent and are inching towards the 9 percent mark, experts say.
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 three policies, the central bank hiked the repo rate by 140 basis points and consequently deposit rates were increased by the banks.
Leading banks are now offering up to 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) |
| State Bank of India | 2.90% to 5.65% | 3.40% to 6.45% |
| HDFC Bank | 2.75% to 6.10% | 3.25% to 6.60% |
| IDBI Bank | 2.70% to 5.75% | 3.20% to 6.50% |
| Kotak Mahindra Bank | 2.50% to 6.10% | 3.00% to 6.60% |
| RBL Bank | 3.25% to 7.00% | 3.75% to 7.50% |
| Punjab National Bank | 3.00% to 6.10% | 3.50% to 6.60% |
| Canara Bank | 2.90% to 6.00% | 2.90% to 6.50% |
| Axis Bank | 2.75% to 5.75% | 2.75% to 6.50% |
| Bank of Baroda | 3.00% to 5.50% | 3.50% to 6.50% |
| IDFC First Bank | 3.50% to 6.90% | 4.00% to 7.40% |
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 Adhil Shetty, CEO at Bankbazaar.com, the consecutive rate hikes have given further momentum to rising FD interest rates.
“The era of low FD rates is now certainly behind us, and FD investors can expect better days ahead. The rate hike momentum is expected to continue for some more time. While the probability of hitting double digit rate in near future are low, it is clear that FD interest rates are slated to hit 8 percent and are inching towards the 9 percent mark,” Shetty said.
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. Nevertheless, there is still more upward movement expected in FDs, as per Shetty.
So, what should depositors do?
According to Gaurav Aggarwal - Senior Director, Paisabazaar, 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, after factoring in the highest interest rate slabs available at the time of renewal,” Aggarwal said.
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.
First Published: Sept 30, 2022 2:53 PM IST
