RBI rate hike: What happens to existing and new fixed deposits? Experts weigh in
The Reserve Bank of India’s (RBI) 25-basis-point repo rate hike to 5.50% is likely to particularly impact those investing in fixed deposits (FDs). However, the impact will not be immediate for those who already hold FDs.
This is because a repo rate hike does not automatically change the interest rate on an FD investment that has already been booked. The rates continue to remain fixed for the agreed tenure. The impact is more relevant for new deposits and FDs that mature and are renewed after the bank revises its deposit rates.
Will existing FDs earn higher interest?
Adhil Shetty, CEO, BankBazaar, said, “The RBI’s 25 basis point increase, to a repo rate of 5.50%, is a welcome step for savers, though the benefit will build up gradually. Banks usually revise deposit rates at their own discretion, and new deposits receive the higher rate first. Existing fixed deposits continue to earn the rate at which they were booked. With the RBI also moving to calibrated tightening, savers can keep an eye on when their deposits mature, so that each one renews at the prevailing rate. Laddering FDs, by splitting money across deposits that mature at different times, also keep part of the money accessible.”
Echoing similar views, Santosh Agarwal, CEO, Paisabazaar, added, “For FD investors, the repo-rate hike could eventually lead banks to increase interest rates on fresh fixed deposits and other deposit products as they compete for deposits. Existing FDs will not be impacted until maturity.”
Why has RBI taken hawkish stance?
The RBI has hiked the repo rate to combat rising inflation.
Radhika Rao, Senior Economist and Executive Director, DBS Bank, said, “The RBI’s October hike acknowledges that cyclical inflation risks are no longer benign. The change in stance also underscores the RBI MPC’s hawkish intent and is reinforced by upward revisions to growth and inflation forecasts. Against a backdrop of elevated oil prices, tighter global financial conditions, and risks to food inflation from unfavourable weather, policymakers have chosen to reinforce inflation credibility before these risks become entrenched.”
Hence, an investor should plan in advance for these risks and not expect interest rates on an existing FD to rise simply because the RBI has hiked the repo rate. However, if the banks raise their deposit rates in response, fresh FDs may offer investors better returns.
What should FD investors do now?
If you are an investor with FD investments nearing maturity, you should carefully compare prevailing rates before automatically renewing them. You should also check rates offered by other banks and lending institutions for similar tenures, while considering factors such as premature withdrawal rules, deposit safety and your long-term economic objectives.
FD laddering can also help investors with managing reinvestment risk effectively. Therefore, instead of investing the entire amount in a single FD, an investor can look towards dividing the funds across deposits with different maturity dates. This will ensure that a portion of the funds becomes available periodically, which can then be reinvested at prevailing rates.
Eventually, the benefit of the RBI’s rate hike for FD investors will depend on how individual banks respond and on the long-term financial planning investors undertake to back themselves.
