Good news for FD investors as RBI keeps repo rate unchanged
2 min read.Updated: 04 Dec 2020, 11:06 AM IST Written By Sangeeta Ojha
RBI keeps benchmark lending rate unchanged at 4%
No change in policy rates means good news for fixed deposit (FD) investors as banks may not cut interest rates on FDs any further
The Reserve Bank of India (RBI), in its bi-monthly monetary meet today, has decided to keep the repo rate unchanged. This is the third time in a row the central bank has kept the key rates unchanged. The status quo on monetary policy was as expected by most economists, amid high levels of inflation. “RBI policy was on expected lines. They have prioritised growth over inflation. This is an acknowledgment that inflation drivers seem to be more supply side led. An accommodative liquidity stance will ensure access to liquidity will not be a challenge and the ongoing recovery continues to gather steam. This will help push through govt borrowings in a year where the revenues are under pressure. Guidance is better than earlier on growth and flows. Positive for markets," Ashish Shanker, Deputy MD and Head of Investment, Motilal Oswal Private Wealth Management said.
"RBI maintains status quo third time in a row; keeps benchmark lending rate unchanged at 4 pc," RBI Governor Shaktikanta Das said.
After the announcement, the repo rate and reverse rate remain at 4% and 3.35%, respectively. No change in policy rates means good news for fixed deposit (FD) investors as banks may not cut interest rates on FDs any further. State Bank of India (SBI) has not cut the interest rate on FDs since September 2020. Currently SBI gives 2.9% to 5.4% interest rate on FDs maturing in 7 days to 10 years. These are effective from 10 September 2020.
How does this change in the repo rate impact depositors
With the cut in repo rate, banks are expected to reduce their fixed deposit rates in the coming days. However, the reduction in deposit rates might not be proportional to the cut in repo rate.
As a depositor, a falling interest rate means that the new deposits you make earn a lower rate and it means lower returns. The fixed or term deposits booked at a higher rate continue to give the higher return till the time of maturity.
RBI Governor Shaktikanta Das further added that the central bank is, "committed to preserve depositors’ interest in financial system."
With no change in the repo rate and reverse repo rate by the central bank, the likelihood of an immediate reduction in EMIs is less.
The central bank had slashed the repo rate by 115 basis points since late March to support growth. RBI had last revised its policy rate on May 22, in an off-policy cycle to perk up demand by cutting interest rate to a historic low.