The Reserve Bank of India (RBI) on Friday in its bi-monthly monetary policy review kept the repo rate unchanged at 6.5 per cent. RBI governor Shaktikanta Das announced the decision after the meeting of the central bank’s monetary policy committee (MPC), which was held from October 4 to October 6.
This is the fourth consecutive time the RBI has kept the repo rate unchanged.
The interest rate at which RBI lends money to banks is known as the repo rate. Any change in repo rate significantly affects the interest rates on various savings instruments and loans offered by banks.
The repo rate currently stands at 6.5 per cent, which is unchanged since the last revision by RBI on February 8, 2023. This adjustment was made in order to address rising inflation and to discourage bank borrowing from the RBI, mainly as a measure of regulating liquidity within the financial system.
How does the RBI repo rate affect FD rates?
There is a direct link between repo rate and interest rates on various savings instruments, including the fixed deposits (FDs). As the repo rate goes up, so does the FD interest rate, and vice versa when the repo rate drops. Banks often revise the interest rates based on the change in repo rate.
The repo rate was low during the pandemic as the focus was on stimulating growth and supporting the economic conditions prevailing. This allowed for the smooth flow of liquidity in the economy. Conversely, after the Covid-19 pandemic was in control the RBI raised the repo rate six times between May 2022 and February 2023, resulting in a hike of 250 basis points. Thereafter, the average FD rates have now jumped from an average of 5.35 per cent and 5.9 per cent per annum in 2022 to over 7 per cent in 2023.
Should you invest in Bank FDs?
As the RBI has kept the repo rate unchanged, the banks are unlikely to further revise the FD rates. In recent months, a few banks have also started reducing FD rates, according to reports. However, any upward revision in Bank FD rates can’t be completely ruled out.
The practice of providing repo-linked interest rates is slowly being adopted by most banks, giving investors the opportunity of benefiting from positive changes in repo rates. Usually, an increase in the repo rate leads to lower real returns. However, with the repo rate remaining unchanged FDs may not yield higher returns.