On Friday (30-09-2022), the decision of the six-member Monetary Policy Committee (MPC), which RBI Governor Shaktikanta Das leads, was made public. To reduce the prolonged above-target retail inflation rate, the Reserve Bank of India (RBI) increased the repo rate by 50 basis points to 5.90%, the fourth consecutive increase in the current cycle.
To reduce the effects of the COVID-induced lockdown, the RBI cut the repo rate in March 2020. It then kept the benchmark interest rate unchanged for nearly two years until raising it on May 4, 2022. Since its first unexpected rate increase in the middle of a meeting in May, the RBI has increased rates by 190 basis points.
This repo rate will have an impact on major financial instruments. Fixed deposit rates are expected to become more enticing in the next days to contain the rising inflation and provide a stable liquidity position. In the interim, the MPC has focused on tightening monetary policy to promote growth and keep inflation within the target range.
Key highlights
At an unexpected meeting in May, the committee raised rates for the first time by 40 basis points. Then, by 50 basis points in June and 50 basis points in August. In his monetary policy address on Friday, RBI Governor Shaktikanta Das noted, "Monetary and liquidity conditions remain accommodating," even as he announced the 28-day Variable Rate Reverse Repo and 14-day VRRR auctions will be combined.
If the RBI's policy repo rate changes, the bank's lending and deposit rates will also fluctuate. However, the financial institutions determine the amount and timing of policy repo modifications.
What is the rate on the repo?
The repo rate is the interest rate at which the RBI loans money to commercial banks. Through the repo rate mechanism, governments can modify the amount of readily available money in an economy.
What does the rising repo rate mean?
Depositors welcome the rate increase, but it will increase loan interest rates. The interest rates on term loans, including mortgages, auto loans, and personal loans, are frequently anticipated to rise when interest rates are raised. On the other hand, deposits seem to become more tempting as interest rates rise during rate hikes, providing significant benefits to depositors on traditional schemes, particularly online fixed deposits. They offer larger yields than market instruments while being less hazardous.
Effect of Repo Rate on Fixed Deposit
The repo rate is the interest rate at which the RBI lends money to the banks for a brief duration. The repo rate hike may be quite positive for investors looking for fixed deposits with minimal risk and attractive yields.
It is projected that FDs will become more valuable as investments. Changes to the RBI's policy repo rate will impact bank lending and deposit rates. The individual banks and NBFCs will make the choices determining the actual rate adjustments.
With a variety of interest payment options, consistent interest rates, special rates for elderly citizens, no market risk, and income tax deductions, fixed deposits are a secure investment option. Before creating a new fixed deposit or renewing an existing one, it is crucial to compare the most recent fixed deposit rates offered by the biggest banks in the country.
With today's increase, the central bank has made it obvious that interest rates are rising and most likely will do so for some time. As a result, your debt mutual funds will probably suffer a setback. Long-term debt funds are expected to lose money in a rising rate environment. For instance, funding for short-term debt may eventually recover. At banks and NBFCs, deposit interest rates are set.
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