As per a recent update on December 7, 2022, when the Reserve Bank of India (RBI) increased the repo rate by 35 basis points, the repo rate climbed up to 6.25% points. To combat inflation, the RBI has increased the repo rate by 225 basis points from May, reaching 6.25% in FY2023. The repo rate is intrinsically linked to the loan and deposit rates that commercial banks offer to retail investors as it is the interest rate when commercial banks borrow money from the RBI. As a result, banks will increase their lending rates to reflect the increase in the repo rate and pass it on to individual investors. Almost all banks have increased interest rates on their fixed deposit products as a result of five consecutive hikes in the key lending rate by the RBI. Analysts expect the MPC to hike interest rates again in February 2023 before taking a break from rate hikes as in its meeting in December, the MPC continued to focus on the return of accommodative measures to ensure that It also decided to keep inflation within the target going forward. promoting development.
Should investors book their fixed deposits in light of rising interest rates on bank fixed deposits, or should they wait for another unexpected move by RBI? We’ll ask our experts to weigh in.
Fintu founder CA Manish P Hinger said, “With effect from May 2022, the Reserve Bank of India has increased the repo rate by 225 basis points (bps), increasing the repo rate from 4.0% at present to 6.25%. When interest rates rise banks immediately increase their lending rates but the effect of rising interest rates on bank fixed deposits is not seen immediately as it is up to the banks to decide how much money they have to lend and what is required to be raised Fixed Interest rates on deposits or not. But over time, as banks need additional liquidity to lend money, they raise their rates to attract investors to deposit their money in banks.”
“It is clear that interest rates are close to their peak which is still a few months away hence further hike in interest rates cannot be completely ruled out. Please note that a major portion of the interest hike in the policy rate has already taken place and most of it has already been factored into the fixed deposit rates, the likely hike in the coming months may not be much. Investors should take advantage of the attractive interest rates available on Fixed Deposits and consider investing for the short to medium term for the next 2 to 4 years. Investors can also consider breaking their existing FDs and use the current opportunity to invest in new FDs offering higher interest rates,” said CA Manish P Hinger.
“On a cautionary note, it is advised that investors should not go with the high rates offered by small finance banks as it is to be noted that in case of bank default, your money is insured only to the extent 5 lakh including principal and interest amount,” said CA Manish P Hinger.
“Finally, the time has come to invest in FDs,” said Nitin Rao, head of products and offerings, Epsilon Money Mart. With the rate hike by RBI, FDs have emerged as an attractive investment option for investors, especially senior citizens. emerging. Street expects FD interest rates to move towards 8.5 – 9% mark soon. While it looks like inflation has peaked and we may get softer inflation going forward, still 25-50 bps There is room for further hikes. All eyes will be on the policy decision in February. There is usually a lag between hikes and lending by banks. Thus, even if an increase in the repo rate is accompanied by an increase in deposit rates, We are seeing banks increasing interest rates now. Small private banks and NBFCs are already seeing 8%+ deposit rates.”
Disclaimer: The views and recommendations given above are those of individual analysts or broking companies and not of Mint. We advise investors to do due diligence with certified experts before making any investment decision.
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