FD investors may have to wait longer to see rate hike benefit


In a bid to contain inflationary pressures, the Reserve Bank of India (RBI) has increased the repo rate by 90 basis points (bps) in a short span to 4.9%. Following this, most banks were quick in raising  lending rates by about 40-90 basis points in the last one month (see table). But, we are yet to see a meaningful hike in fixed deposit (FD) interest rates. 

When the RBI reduced the repo rate in 2020 to contain the economic impact caused by the pandemic, banks slashed the deposit rates to multi-year lows. 

As per RBI data, the weighted average deposit rate offered by scheduled commercial banks in India has fallen by 149 bps  (one basis point is one hundredth of a percentage point) from January 2020 to April 2022 to a low of 5.03%. 

Then why are the interest rates on FDs not moving up meaningfully, despite the repo rate hike now?

This is because interest rates on FDs are directly linked to the banks’ liquidity position and not on the repo rate, according to experts. 

“Deposit rates are a function of how much liquidity the bank has and the prevailing competition between banks to get more customers,” said Raj Khosla, founder, My Money Mantra. 


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As the liquidity position of banks comes down, the requirement to obtain more funds in the form of FDs goes up. This is when banks, typically, hike rates on deposits to attract new customers. 

Going ahead, deposit rates are expected to have an upward trajectory. 

Joydeep Sen, an independent debt market analyst, said “the liquidity with banks has come down from about 8 trillion, at its peak, to about 3 trillion now. Banks’ liquidity is further expected to come down as the credit offtake ticks up. As the focus shifts to deposits, the interest rates offered on FDs will also go up gradually in the next one year, but not at the same pace as repo-linked lending rates.”

Thus, FD investors may have to wait longer to see the benefit of higher interest rates. You can avoid investing in longer tenure deposits as of now, as you may miss the opportunity to re-invest at higher rates as the interest rates move up. 

Deposits from small finance banks (SFBs) can also be considered as they offer 25-100 basis points higher interest compared to public and private sector banks. The deposits with SFBs are also covered under the Deposit Insurance and Credit Guarantee Corporation of India, under which each depositor is insured up to 5 lakh for both principal and interest.

Cost on loans 

Borrowers must brace for the higher interest rates on their loans. Commenting on the impact on home loan borrowers, Adhil Shetty, CEO, BankBazaar, said “for borrowers with repo-linked home loans, the bottom will move up from 6.5%-6.8% by 90 bps to 7.4%-7.7% at their next reset date, and quite likely exceed 8% in the near future. New borrowers or refinancing borrowers with high eligibility (stable income, credit score over 800) can still bargain for slightly lower rates.” 

If your loan is MCLR-linked (Marginal Cost of Funds Based Lending Rate), the reset of interest rate upwards will be at the next reset as mentioned in the loan agreement. “In a rising rate scenario, MCLR borrowers may evaluate whether it is cheaper to refinance to repo or stay with the same loan. We’ve seen that repo is cheaper in most cases,” added Shetty.

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