On June 6, the RBI cut the repo rate by 50 basis points in its monetary policy review. This was more than expected, as many thought the cut would only be 25 basis points.
This is good news for home loan borrowers, both new and existing, because their interest rates will go down.
But it is not good news for people who have money in fixed deposits (FDs) at banks. So, what should FD holders do now?
Repo rate has fallen by 1 percent this year
After this repo rate cut, banks will reduce interest rates on home loans, car loans, and personal loans. They will also lower interest rates on fixed deposits.
Earlier this year, RBI cut the repo rate by 25 basis points in February and then again by 25 basis points in April.
Today, they made a third cut of 50 basis points. This means banks will soon lower interest rates on loans like home and car loans.
Why do banks reduce FD interest rates?
Banks earn most of their profit by lending money at higher interest rates. When RBI lowers the repo rate, banks have to reduce loan interest rates, even if they don’t want to.
To balance their earnings, banks also cut interest rates on fixed deposits and savings accounts.
After the two repo rate cuts earlier this year, many banks have already lowered FD interest rates.
How much will FD interest rates fall?
Experts say both public and private banks will cut FD interest rates soon. It’s not yet clear if the cut will be 50 basis points, more, or less.
Banks decide this based on how much money they need. Banks that need more money may reduce rates less, while those with less demand may reduce rates more.
What should you do?
If you already have an FD, don’t worry until it matures. The interest rate you agreed on will stay the same until maturity.
But if your FD is about to mature, think carefully before renewing it. Banks may offer a lower interest rate on renewal.
In that case, it’s better not to renew your FD. Instead, withdraw your money and look for banks still offering higher FD rates.
Many banks still offer good FD interest rates, so you can open a new FD with them.
Planning to open a new FD?
If you want to open a new FD, act quickly. After the repo rate cut, banks may take some time before lowering FD interest rates.
It’s better to open an FD now with a bank offering good interest rates before they go down.
Right now, several banks offer 7.5% to 8% interest on long-term FDs.
It’s best to invest for at least 1.5 to 2 years, as repo rate cuts are expected to continue. Whenever the repo rate falls, banks lower FD interest rates too.
