Are FD rates finally set to drop?
Dear Investor,
In today’s rapidly evolving financial sector, it is sometimes hard to keep up with all that is happening. Thankfully, any major changes that happen are under strict central regulation to ensure the stability of the financial system. The Reserve Bank of India plays a major role, and regularly makes policy changes to keep up with the times.
The RBI’s Monetary Policy Committee (MPC) meets every 2 months to discuss and implement changes in various policies. The most recent meeting concluded today,
7th February 2025
, and one important thing to note is that theRepo Rate was cut by 25bps,
dropping from6.50%
to6.25%.
Expect prevailing FD rates to drop!
“But what is the Repo Rate?”
Technically, Repo stands for ‘Repurchasing Option’. But what does that mean?When banks face a shortage of liquid funds, they can technically borrow money from the RBI. In such an arrangement, banks “sell” eligible securities, like Treasury Bills, to the RBI, as a temporary measure. The agreement then allows for the bank to repurchase these securities at a set price later. This price is calculated considering it to be a loan at an interest rate equal to the Repo Rate, hence the name. This arrangement serves as a short-term borrowing mechanism.
TL;DR - To draw a parallel - when you take a loan from a bank, you pay interest on the amount borrowed. In a similar way, banks sometimes need to borrow funds from the RBI when they face short-term liquidity shortages. The interest rate banks pay on these borrowed funds is known as the Repo Rate.
“Okay, I get it. The Repo Rate affects banks’ borrowing of money. Why should that affect me?”
That’s where the indirect effects of RBI policy come into play. When the Repo Rate increases, banks find it more expensive to borrow from the RBI. So, they look for alternative sources of short-term income. And where does a bank get liquidity from? It’s customers!
To offset reduced borrowing from the RBI, they may pass the burden onto consumers by increasing lending rates and boosting the interest rates on deposits. Meaning loans become more expensive, while FDs become more attractive with higher returns.
Conversely, a decreased Repo Rate means cheaper credit for banks, so they have a lesser need for customers’ funds. This leads to cheaper loans and lower returns on deposits.
“Got it, I’ll keep an eye on Repo Rates going forward. What is the current status?”
As of 7th February 2025, the Repo Rate is 6.25%, having changed for the first time since February 2023.
(Historical data as per RBI records)
The million-dollar question - “Is this the best time to invest in FDs?”
As we have seen, FD rates are strongly influenced by Repo Rates. And the change in Repo Rate this time is certainly going to cause some changes. Lock in the top rates of the decade before they drop!
Rates are as high as they’ve been in the past 8 years! And while major banks are a good indicator of general trends, Small Finance banks offer even higher interest rates on FDs, currently as high as 9.5% p.a.!
(As per RBI records , for 5 major banks)
As we’ve seen today, an understanding of how monetary policy can affect you can be crucial in deciding how to invest your funds. We’ll be sure to keep you informed with such deep dives into the financial system.
Until next time, have fun Super Investing!
Disclaimer: This content is meant purely for educational purposes and is not to be taken as an investment advisory.