On June 6, the RBI announced a 50 basis points cut in the repo rate during its monetary policy review. This cut was bigger than expected, as many had predicted only a 25 basis points reduction.
This move is good news for home loan borrowers, both new and existing, as they will benefit from lower interest rates. However, it is not favorable for people who keep money in fixed deposits (FDs) at banks. So, what should these customers do now?
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Repo rate has dropped by 1 percent this year
Following the RBI’s cut in the repo rate, 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, in February, RBI reduced the repo rate by 25 basis points for the first time, and then again by 25 basis points in April. Today, the third cut of 50 basis points has been made. This means banks will soon reduce interest rates on loans like home and car loans.
Why do banks reduce interest on FDs?
Banks make most of their profit by lending money at higher interest rates. When the RBI lowers the repo rate, banks must reduce the interest rates on loans even if they don’t want to.
To balance this, banks also cut interest rates on fixed deposits and savings accounts. After the repo rate was cut twice this year, many banks have already lowered FD interest rates.
How much can banks reduce FD interest?
Experts say that both public and private banks will lower FD interest rates in the near future. It’s not clear yet whether banks will cut the rates by 50 basis points or more or less.
Banks decide this based on their need for funds. Those needing more funds might reduce the interest rate less, while banks with less demand might reduce it 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, you should think carefully before renewing it. Banks may offer you a lower interest rate for renewal.
In this case, it’s better not to renew the FD. Instead, withdraw your money and look for banks that still offer higher FD rates. Many banks continue to provide good interest rates on FDs, so you can open a new FD with those banks.
Planning to open a new FD?
If you want to open a new FD, you should act quickly. After the repo rate cut, banks may take some time to reduce FD interest rates. It’s better to open an FD now with a bank offering attractive interest rates before they are lowered.
Currently, several banks offer 7.5% to 8% interest on long-term FDs. It is advisable to invest in FDs for at least 1.5 to 2 years, as repo rate cuts are expected to continue. Whenever the repo rate falls, banks will reduce FD interest rates accordingly.