The Reserve Bank of India (RBI) on June 8 kept the repo rate unchanged at 6.5 per cent after its bi-monthly monetary policy review. The six-member Monetary Policy Committee (MPC) took the decision to retain the repo rate due to the improved macroeconomic conditions.    

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

Since May 2022, the RBI has raised interest rates six times, and this is the second time in a row that it has decided to keep the key benchmark policy rate unchanged.

The repo rate is the rate at which banks and financial institutions borrow money from the central bank to meet their liquidity requirements. So, when the repo rate is increased by the RBI the cost of borrowing for banks goes up.

Generally, the interest rates on fixed deposits and other savings schemes are revised with a change in the repo rate. Once the repo rate is increased, the banks pass on the burden to the customers. Usually, the interest rate on loans goes up and fixed deposit rates go down in such a scenario.  

The RBI’s decision could be advantageous to investors as the banks are unlikely to reduce the interest rates.  

Possible Impact of unchanged Repo Rate on FDs

The unchanged repo rate, along with excess liquidity in the banking system, may cause larger banks with ample deposit mobilisation to halt their fixed deposit (FD) rate hikes in the near term.

The investors may now look forward to gains from the fixed deposits in the long term, particularly if they are being offered competitive returns. But, banks with more aggressive credit growth goals or those with comparably smaller deposit bases may raise FD rates more to accomplish their desired credit growth, Kukreja states.

Furthermore, RBI cut its 0.1 per cent inflation target and has set the repo rate at 6.5 per cent for the time being. This suggests that rotating shorter maturities may not offer additional benefits for fixed deposit and small savings plans.