Impact of Rising Repo Rate on Fixed Deposits: What should FD holders do now? | The Financial Express

Impact of Rising Repo Rate on Fixed Deposits: What should FD holders do now?

Some people looking to invest in FDs might be wondering whether to invest their money right now or wait for some more time to get better deals on fixed deposits. So, what should they do now?

Impact of Rising Repo Rate on Fixed Deposits: What should FD holders do now?
Consumers planning to park their surpluses in fixed deposits should stick to tenures of 1 to 2 years.

The Reserve Bank of India (RBI) has raised the repo rate by 35 bps for the fifth time in a row this year, taking it to 6.25% from 5.9% earlier. The move will make loans, including home loans, more costly for the borrowers as banks and HFCs will increase their rates further.

However, this is good news for investors and depositors as many banks will also increase their FD rates in the days and weeks to come, which will help the depositors earn better returns. But some people looking to invest in FDs might be wondering whether to invest their money right now or wait for some more time to get better deals on fixed deposits. Some of the existing FD holders might also be in a fix. So, what should they do now?

Industry experts say apart from the changes in the policy rates, the increase or decrease in the fixed deposit rates is also influenced by the gap between credit growth rates and deposit growth rates. As long as the credit growth rates outperform the growth rates of bank deposits, banks would continue to increase their FD rates to attract more fixed deposits to meet the increasing credit demand.

Moreover, there is also often a lag between the rising policy rates and increase in FD rates as the transmission of rising policy rates to FDs usually takes some time. Thus, while the pace of policy rate increases is widely expected to slow down, the same cannot be said about the increase in FD rates.

Also Read: What should home loan borrowers do now as RBI hikes repo rate again?

So, “the existing FD depositors should continue with their FDs till their maturity. Parking their incremental savings in fixed deposits at regular intervals would allow them to book from continued increase in FD rates. Depositors should opt for premature FD closure only when they find a significant gap between the new FD rates and the effective rates on their existing FDs after accounting the premature withdrawal penalty,” said Naveen Kukreja, CEO & Co-founder, Paisabazaar.

Consumers planning to park their surpluses in fixed deposits should stick to tenures of 1 to 2 years. “As fixed deposit rates can be expected to further increase over the short term, consumers should avoid auto renewal facility while booking their fixed deposits. This might allow them to renew their fixed deposits at higher interest rates, after factoring in the highest interest rate slabs available at the time of renewal,” added Kukreja.

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First published on: 07-12-2022 at 15:33 IST