On Friday, the Reserve Bank of India (RBI) 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 central bank’s monetary policy committee (MPC) meeting, which was held from October 4 to 6.
This is the fourth consecutive time that the RBI has kept the repo rate unchanged.
The interest rate at which the RBI lends money to banks is known as the repo rate. Any change in the repo rate significantly affects the interest rates of various savings and loan instruments offered by banks.
The repo rate currently stands at 6.5 per cent, which has not changed since the last review by the RBI on February 8, 2023. This adjustment was made to address rising inflation and discourage RBI bank borrowing , mainly as a regulatory measure. liquidity within the financial system.
How does RBI repo rate affect FD rates?
There is a direct link between the repo rate and the interest rates of various savings instruments, including fixed deposits (FDs). As the repo rate increases, the interest rate on the FD also increases, and vice versa when the repo rate goes down. Banks usually revise interest rates based on the change in the repo rate.
The repurchase rate was low during the pandemic as the focus was on stimulating growth and supporting prevailing economic conditions. This allowed the smooth flow of liquidity in the economy. On the contrary, once the Covid-19 pandemic was under control, the RBI increased the repo rate six times between May 2022 and February 2023, resulting in an increase of 250 basis points. Since then, average DF rates have jumped from an average of 5.35 percent and 5.9 percent annually in 2022 to more than 7 percent in 2023.
Should I invest in bank financial funds?
As the RBI has kept the repo rate unchanged, banks are unlikely to revise the FD rates further. In recent months, some banks have also reportedly started reducing FD rates. However, an upward revision in Bank FD rates cannot be completely ruled out.
Most banks are slowly adopting the practice of offering repo-linked interest rates, offering investors the opportunity to benefit from positive changes in repo rates. Typically, an increase in the repo rate leads to lower real returns. However, if the repo rate remains unchanged, FDs may not generate higher returns.