On June 6, RBI cut the repo rate by 50 basis points, more than the expected 25 bps. This is good news for home loan borrowers, as both new and old loan customers will benefit from lower EMIs.
However, this is bad news for those who keep money in bank fixed deposits (FDs). So, what should FD customers do now?
Repo Rate Has Dropped by 1% This Year
This is the third repo rate cut this year. RBI reduced it by 25 bps in February, again by 25 bps in April, and now by 50 bps in June.
Following these cuts, banks will lower interest rates on home loans, car loans, personal loans, and fixed deposits soon.
Why Do Banks Reduce FD Interest Rates?
Banks earn money by lending loans at high interest rates. When RBI lowers the repo rate, banks must reduce their loan interest rates too.
To balance this, banks also lower interest rates on fixed deposits and savings accounts. Many banks have already cut FD rates after the earlier repo rate reductions.
How Much Will FD Interest Rates Fall?
Experts say banks will reduce FD interest rates in the coming days, but the exact amount is uncertain.
Some banks might reduce rates by 50 bps or more, depending on how urgently they need funds. Banks needing more funds may reduce rates less, while others may reduce them more.
What Should Existing FD Customers Do?
If your FD is already active, don’t worry — the interest rate you agreed on will stay until maturity. But if your FD is maturing soon, think carefully before renewing.
Banks will likely offer a lower interest rate on renewal. It may be better to withdraw your money and look for banks offering better FD rates. Some banks still offer attractive rates, so check around before reinvesting.
Planning to Open a New FD?
If you want to open a new FD, act quickly. Banks will take some time to reduce FD interest rates after the repo cut.
Try to open an FD now at a good interest rate before banks reduce them. Currently, many banks offer 7.5% to 8% interest on long-term FDs.
It’s advisable to choose an FD tenure of 1.5 to 2 years or more, as repo rate cuts and interest rate reductions are expected to continue in coming months.
