What is Repo Rate?
The Repo Rate is the interest rate at which the central bank (Reserve Bank of India – RBI) lends money to commercial banks in case of short-term liquidity shortages. It is a key monetary policy tool used to control inflation, liquidity, and economic growth.
How Repo Rate Works?
When banks need funds, they borrow from the RBI at the repo rate. If the repo rate is high, borrowing becomes expensive, reducing the money supply in the economy. Conversely, a lower repo rate makes borrowing cheaper, increasing liquidity.
Impact of Repo Rate on Fixed Deposits (FDs)
1. Higher Repo Rate and FD Interest Rates
When the RBI increases the repo rate, banks have to pay more interest on borrowed funds. To recover these costs, they often increase the interest rates on FDs, making them more attractive to investors.
2. Lower Repo Rate and FD Interest Rates
When the RBI lowers the repo rate, borrowing becomes cheaper for banks. This leads to lower interest rates on FDs, reducing returns for depositors.
Why Does Repo Rate Affect FD Rates?
Banks determine FD interest rates based on the cost of funds. When borrowing costs (repo rate) rise, banks increase deposit rates to attract funds. Conversely, when repo rates drop, FD rates decrease as banks can borrow cheaply from the RBI.
Should You Invest in FDs When Repo Rate is High?
Yes! A higher repo rate means banks offer higher FD interest rates. Locking in FDs during such periods ensures better returns over time.
Conclusion
The repo rate significantly influences FD interest rates. When repo rates rise, FD returns improve, and when they fall, FD interest rates decline. Understanding this relationship helps investors make informed decisions about fixed deposits.