The Reserve Bank of India (RBI) plays a critical role in shaping India's monetary policy and regulating the country's banking system. One of the main tools the RBI uses to influence market interest rates is the repo rate, which refers to the rate at which it lends to commercial financial institutions. Changes in the repo rate, in turn, affect interest rates on fixed deposits (FDs) offered by banks and Non-banking Financial Companies (NBFCs).
In Feb 2025, the RBI reduced the key repo rate by 25 basis points, from 6.50% to 6.25%, the first cut since 2020. This rate cut is anticipated to encourage financial institutions to reduce their FD rates.
Typically, when the RBI cuts the repo rate, it allows financial institutions to borrow money at cheaper rates. This enables banks and NBFCs to reduce interest rates on loans and advances. Sometimes, financial institutions may wait to assess market conditions before adjusting their deposit rates. Some might not cut rates immediately, especially during busy quarters when they need deposits to support credit growth.
Typically, FD interest rates tend to move in tandem with the RBI's stance on the repo rate. Here is a closer look at how RBI's rate cut impacts FD interest rates.
RBI's Stance
Over the past couple of years, the RBI has maintained a neutral stance and reduced the repo rate sharply to boost credit flow and support economic growth. In May 2020, the RBI reduced the policy repo rate by 40 basis points (bps) to 4.0% from 4.40% under the liquidity adjustment facility.
Accordingly, the marginal standing facility rate and the bank rate were reduced to 4.25% from 4.65%. The reverse repo rate was lowered to 3.35% from 3.75% as well.
According to the RBI's Monetary Policy Committee (MPC), these measures aimed at lowering borrowing costs in the economy while ensuring that inflation remained within the target range. The MPC vowed to continue with the accommodative stance as long as necessary to revive growth and mitigate the impact of COVID-19 on the economy.
This stance prompted banks to cut FD interest rates over the past couple of years. Top financial institutions reduced their FD rates by significant basis points during this period in tandem with the sharp rate cuts by the RBI.
However, the RBI paused rate cuts in 2020 as inflation pressures resurfaced. This led to banks and NBFCs holding their deposit rates steady.
How RBI's Rate Cut Can Affect Consumers
When the RBI cuts the repo rate, financial institutions can borrow from the central bank at cheaper rates. This enables them to pass on the benefits to end consumers in the form of reduced interest rates on loans and advances. However, the transmission of the rate cut to actual lending rates differs across financial institutions. While some financial institutions reduce their loan rates in line with the repo rate cut, others may only pass on a portion of the cut.
On the other hand, the lower interest rate environment also leads to a reduction in deposit rates offered by financial institutions. Banks do this to maintain their profit margins. They need to balance the cost of borrowing money (which is lower due to rate cuts) with the income they earn from lending. This means customers earn less interest on their investments.
Impact on Fixed Deposit Investors
The latest repo rate cut is expected to encourage banks and NBFCs to reduce their FD rates. This means new investors looking to invest funds in FDs will earn relatively lower interest income compared to those who locked in rates earlier when they were higher.
It is advised that customers looking to invest in FDs should go ahead before financial institutions announce any rate cuts. Investing now will allow investors to lock in these higher rates and earn higher interest even if the rates subsequently fall.
How to Get the Best FD Rates?
When interest rates are on a downward trend following RBI rate cuts, investors need to be smart to lock in better returns. Here’s how:
- Using online portals, you can compare FD interest rates across multiple financial institutions. This will let you find the financial institution offering the highest rate for your investment timeline.
- Stay updated on FD rate cuts by closely tracking RBI's monetary policy. Invest your funds before any rate declines happen to lock in higher interest.
- Ladder your FDs across varying tenures instead of locking all money in one tenure to manage reinvestment risk. Lock in longer tenure FDs (for example, 5 years) when interest rates are peaking to secure the high rate.
- Invest in FDs offered by NBFCs or corporate FDs to earn higher interest than commercial banks for the same tenure.
- You can opt for FDs for senior citizens, which typically offer 0.25-0.50% additional interest over regular FDs.
Summary
The RBI's monetary policy stance over the past few years has prompted a reduction in FD interest rates across the financial system. Investors should proactively monitor interest rates to capitalize on optimal fixed deposit yields, given potential delays in the transmission of RBI rate cuts by financial institutions. Paying attention to liquidity conditions, competitive pressures, and other factors can also help investors lock in attractive FD rates even when interest rates are on a downward trajectory.
