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Banks tend to lower the interest rates on FDs when the RBI decreases its short-term lending rate, popularly known as ‘repo rate’, and vice-versa.
Repo Rate Cut Impact On FD Interest Rates.
Even as the RBI MPC on Friday cut the repo rate for the first time in nearly five years, the reduction in the interest rates may prompt banks or lenders to lower fixed deposit (FD) rates also, directly impacting their customers who have parked funds in FDs for fixed returns.
The RBI MPC cut the benchmark rate, which is an interest rate at which it lends money to banks, by 25 bps to 6.25 per cent from 6.50 per cent.
The repo rate is said to be directly proportional to FD interest rates. However, any changes in the FD interest rates are subject to the bank’s decision.
Banks tend to lower the interest rates on FDs when the RBI decreases its short-term lending rate, popularly known as ‘repo rate’, and vice-versa. Lowering rates on FDs dissuade customers to park their money in the banks as returns become lesser.
Banks Expected To Reduce FD Rates
Public and private lenders will soon start reducing the interest rates on fixed deposits in alignment with the reduction of the repo rate. Customers can invest in FDs at this moment to enjoy higher returns before banks start lowering the rates.
Customers enjoy the higher interest rates on FDs for a long time, thanks to constant increase of repo rate by the RBI post the covid-19 impact in 2021. The RBI had raised the repo rate by 250 bps between May 2022 and February 2023 and kept unchanged for a long time.
Recently, several banks have hiked interest rates on FDs depsite rate cut anticipation. Union Bank of India, Punjab National Bank, Karnataka Bank, Federal Bank, Axis Bank, Shivalik Small Finance Bank and many more have revised their rates on FDs to attract deposits by offering higher returns.
Home Loan EMIs To Come Down Too
The repo rate cut may also prompt home loan lenders to lower their interest rates on floating-rate home loans. Customers may enjoy the decrease burden of EMIs on home loans once the lenders lower the rates.