The Reserve Bank of India (RBI) raised the repo rate by 25 basis points to 5.5 percent from 5.25 percent on Oct. 7.
While a repo rate hike does not automatically mean that FD rates will rise immediately or by the same amount, banks could gradually revise deposit rates depending on their funding requirements, liquidity position and competition for deposits.
The RBI's Monetary Policy Committee (MPC) met from Oct. 5 to 7.
Why Could FD Rates Rise After an RBI Repo Rate Hike?
The transmission from the repo rate to fixed deposit rates is not one-to-one. Banks do not necessarily increase FD rates every time the RBI changes its policy rate.
However, sustained interest rate increases can raise banks' overall cost of funds. More importantly, banks must also mobilise deposits to support lending, particularly when credit growth remains strong.
If banks need to attract more household savings, offering higher FD rates can make term deposits more attractive. Therefore, if the RBI starts a rate-hiking cycle, some banks could increase FD rates, especially for tenures where they need to raise more deposits.
Will All Banks Increase FD Rates By 25 Basis Points?
No. A 25-basis-point repo rate hike does not mean that every bank will immediately increase its FD rates by 25 basis points.
Banks consider several factors before changing deposit rates, including their liquidity position, credit demand, existing deposit base, maturity profile and competition from other lenders.
Banks with sufficient deposits may not need to increase FD rates immediately. Lenders, on the other hand, looking to accelerate deposit mobilisation could be quicker to offer higher rates.
The increase could also be selective. Instead of raising rates across all tenures, banks may offer better rates on specific maturities to attract deposits.
Why Are Banks Under Pressure To Offer Higher FD Rates?
Competition for deposits becomes more important when loan growth outpaces deposit growth. When banks lend faster than they attract deposits, they need additional funding to support their loan books.
This can increase competition for household savings.
Higher yields on government securities and other relatively safe fixed-income investments can also influence banks' deposit pricing. If alternative fixed-income avenues offer attractive returns, banks may need to keep their FD rates attractive to savers.
Some banks have already been revising their FD rates ahead of the October MPC meeting, although the direction and extent of these changes have varied across lenders.
What Does A Repo Rate Hike Mean For FD Investors?
A rate-hike cycle could benefit savers looking to invest in fixed deposits. If banks start raising FD rates, people with excess money could lock in higher returns.
However, investors should not rush to book very long-term FDs solely because of a single repo rate hike.
If the RBI enters a prolonged rate-hiking cycle, FD rates could rise further in stages. Locking the entire amount into a long-term FD immediately could then mean missing out on potentially higher rates later.
A staggered approach, commonly known as FD laddering, can help investors spread their deposits across different maturities and reduce the risk of locking in at an unfavourable rate.
New vs Existing FDs: Will Your Interest Rate Increase?
For people who already have a fixed deposit, a repo rate hike will not change the interest rate on that FD.
The rate is fixed for the tenure at the time of booking, unless the deposit product specifically comes with variable-rate terms. Therefore, existing depositors would generally continue earning the rate agreed upon when the FD was opened.
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