money

In the June MPC meeting, the Reserve Bank of India (RBI) raised the policy repo rate by 0.5 per cent or 50 basis points. Previously, the first Monetary Policy Committee (MPC) meeting for the fiscal year 2022-23, held in April 2022, had kept the policy repo rate at 4%.

To temper the rising inflation and ensure a sound liquidity position, fixed deposit rates are expected to become more appealing in the coming days. Meanwhile, the MPC has agreed to maintain its focus on tightening monetary policy to keep inflation within the target range while supporting growth.

At its meeting on June 8, 2022, the Monetary Policy Committee (MPC) resolved, based on an assessment of the current and evolving macroeconomic situation:

  1. With immediate effect, raise the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points to 4.90 per cent. As a result, the standing deposit facility (SDF) rate has been changed to 4.65 per cent, while the marginal standing facility (MSF) rate has been adjusted to 5.15 per cent, and the Bank Rate has been adjusted 5.15 per cent.
  2. The MPC also resolved to keep its focus on removing accommodation to ensure that inflation stays within target while supporting growth in the future. The RBI governor stated, “These choices consistently achieve the medium-term target for consumer price index (CPI) inflation of 4% within a +/- 2% band while sustaining growth.”

Any change in the RBI’s policy repo rate will affect the bank’s lending and deposit rates. However, the bank determines the amount and timing of policy repo modifications to be passed on.

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What is the repo rate?

The repo rate is the rate at which RBI lends money to commercial banks. By raising or lowering accessible cash, governments can control the money supply inside economies through the repo rate system.

What the increase in repo rate means?

Depositors welcome the rate boost, but it will result in higher loan interest rates. During a rate hike, usually, the interest rates on term loans such as houses, vehicles, and personal loans, among others, are expected to rise. On the other hand, deposits appear to grow more appealing as interest rates rise during rate hikes, providing substantial rewards to depositors on traditional schemes, particularly online fixed deposits, which are less risky than market instruments and offer guaranteed returns.

Impact of repo rate on Fixed Deposit

The repo rate is the interest rate at which the RBI lends money to banks for a brief period. The increase in the repo rate could be excellent news for investors searching for low risk fixed deposits with good yields.

The value of FDs as a form of investment is expected to rise. The RBI’s policy repo rate changes impact both bank lending and deposit rates. The actual rate adjustments are determined by decisions made by individual banks and NBFCs.

Fixed deposits are a safe investment option that offers stable interest rates, special rates for elderly citizens, a variety of interest payment methods, no market risk, and income tax deductions. Before forming a new fixed deposit or renewing an existing one, it is critical to evaluate the latest fixed deposit rates offered by the country’s leading banks. 

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With today’s boost, the central bank has made it obvious that interest rates are rising and will likely remain so for some time. As a result, your debt mutual funds are likely to suffer a setback. Long-term debt funds are likely to lose money in a rising rate environment. Short-term debt funds, for example, may recover after a period. The interest on bank and NBFC deposits like fixed deposits are expected to increase. 

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