What happens to FD interest rates after RBI MPC hikes interest rates? Calculation explains basis 25 bps

The Reserve Bank of India today raised repo rate by 25 basis points to 5.50% from 5.25%, marking the first increase since February 2023. Members of the RBI’s Monetary Policy Committee (MPC) voted unanimously to raise rates by 25 bps and in a 4-2 majority to change the policy stance to “calibrated tightening”.

It noted that in the current situation, rate cuts are not a possibility in the near term. The RBI Governor Sanjay Malhotra, in his speech, flagged the threat of inflation, citing that global inflation may increase sharply, prompting global monetary tightening. Thus, there could be further hikes or a pause on current interest rates.

What happens to FD interest rates?

Notably, the RBI’s decision does not mean banks will immediately or automatically increase fixed deposit rates.

This is because while the repo rate influences deposit rates, banks also factor in liquidity, deposit mobilisation needs and credit demand before revising FD offerings. Overall, a higher repo rate could eventually lead to better interest rates on new deposits as banks work out their costs and try to lure investors.

Thus, while the repo rate hike is for 25 bps, the transmission to FD rates may not be for the full 25 bps (or 0.25%), and market participants expect potential benefit only for new or renewed deposits.

What should bank FD investors do?

New investors or those looking to reinvest can keep a watch over the next months, for any official increase in interest rates of fresh FDs and recurring deposits (RDs) at public and private banks across the country.

For existing investors, your rate of interest remains locked-in for the remaining tenure / duration of your deposit. You can however choose to reinvest at a higher rate or take advantage of the FD laddering strategy to make the most of better rates in the future.

• For a senior citizen depositing ₹1 lakh in 5 year tenure at interest rate of 6.20% p.a. your final FD would be of ₹1,35,089.81. If the full 25 bps hike is applied, a fresh FD at same tenure of 5 years, at 6.30% would be ₹1,36,687.35. This is a difference of ₹1,597.54.
• For a senior citizen depositing ₹1 lakh in 5 year tenure at interest rate of 7.20% p.a. your final FD would be of ₹1,41,570.88. If the full 25 bps hike is applied, a fresh FD at same tenure of 5 years, at 7.45% would be ₹1,43,229.38. This is a difference of ₹1,658.50.

Disclaimer: This story is for educational purposes only. We advise investors to check with certified experts before making any investment decisions.