RBI Repo Rate Hike: What 25 Bps Rate Increase Means For Your Fixed Deposits

Fixed deposit investors could be in line for better returns after the Reserve Bank of India (RBI) raised the repo rate by 25 basis points to 5.50% on Wednesday, October 7, though the benefit will depend on how banks respond to the policy move.

The first RBI rate hike since February 2023 has turned the focus back to deposit rates, which banks could review as funding costs move up. Any increase in FD rates, however, will neither be automatic nor necessarily match the 25-bps increase announced by the central bank.

There is also no change in the interest earned on an FD that has already been booked. Existing deposits will continue at their contracted rates until maturity. The RBI decision becomes more relevant for people opening a new FD or renewing one over the coming months, particularly if banks begin raising deposit rates.

Banks have not announced an across-the-board revision in FD rates following Wednesday's policy decision. The timing and size of any change will be decided by individual lenders.

RBI Rate Hike Puts Focus On Bank FD Rates

The repo rate has been raised to 5.50% from 5.25% after the Monetary Policy Committee voted unanimously for a 25-bps increase.

Along with the rate action, the RBI changed its policy stance from neutral to calibrated tightening, with four of the six MPC members voting for the shift.

For banks, the turn in the interest-rate cycle could change the cost of raising money. While borrowers face the prospect of higher lending rates, banks looking to mobilise deposits could also review the rates offered to savers.

Deposit rates are not directly pegged to the repo rate. Banks price them based on factors including their funding needs, liquidity and credit demand. That is why a 25-bps RBI hike need not result in a similar 25-bps increase across FD tenures.

The response can also differ from one lender to another. A bank may choose to raise rates only for certain maturities, while another may leave its deposit rates unchanged.

At present, FD rates offered by major banks vary by tenure, with some large lenders offering around 6.30% to 6.65% on select deposits. Senior citizens typically receive a higher rate than regular depositors.

Whether those rates now move up will become clearer as banks review their deposit and lending rates following the RBI policy.

Existing FDs To Continue At Contracted Rates

For existing FD holders, there is no immediate change. A fixed deposit locks in the interest rate available when the money is placed with the bank. A deposit booked at 6.5%, for instance, will continue earning 6.5% until maturity even if the bank raises the rate on fresh deposits later.

The RBI hike could matter when that FD matures. If the bank has raised its deposit rates by then, the money can be renewed at the rate available on the maturity date.

The same applies to fresh deposits. Investors opening an FD after a bank announces higher rates would be eligible for the revised rate applicable to the chosen tenure.

This also means the benefit from a higher-rate environment may take time to show up for depositors. Unlike floating-rate loans, where benchmark-linked rates can be reset, an existing FD does not get repriced every time the RBI changes the repo rate.

The latest decision has nevertheless changed the direction of the rate cycle. The RBI had last raised the repo rate in February 2023. Wednesday's 25-bps increase, coupled with the move to calibrated tightening, has brought the possibility of higher borrowing as well as deposit rates back into focus.

For FD investors, the next signals will now come from banks themselves as they decide whether the higher policy rate warrants changes to deposit rates and, if so, which tenures get revised first.

Also Read - RBI Repo Rate Hike: How Much Will Your Home Loan EMI Rise After 25 Bps Rate Increase?