- Date : 19/07/2022
- Read: 4 mins
RBI hikes the REPO rate by 50 basis points to 4.90% and FD interest rates head north, while most banks offer interest rates of 5.50% and senior citizens get 6.25%. (Interest rates of HDFC under the new REPO rate for 5-10 years)
RBI has on the 8th of June again increased the REPO rate to 4.90%, leading to high rates of interest in Fixed Deposit schemes.
What does the REPO rate mean & why it is increased now?
REPO rate stands for Re-purchasing option rate. This is the interest rate at which the Reserve Bank of India loans money to commercial banks when they run out of cash to lend to their clients. Before lending to their clients, commercial banks add a mark-up that includes different bank charges as well as a profit, which is then passed on to the customer in the form of an interest rate. The current REPO rate is at 4.90% as announced by the RBI on the 8th of June 2022. The economy gets inundated with money when the REPO rate is reduced, as it was during the COVID-19 epidemic, and the economy continues to develop until inflation occurs. Then the RBI increases the rates as it did on the 8th of June 2022, causing the economy to stall and the RBI to collect the extra money in the market. This situation leads to higher interest rates on Fixed Deposits, as people are encouraged to save more.
READ ALSO: Any questions on Fixed Deposits.
What is the REPO Rate and How Does it Work?
REPO rate is best understood when banks sell securities and bonds to RBI, like gold, gold bonds, treasury bills, etc, and against them, RBI extends cash to the banks. The banks do this as they run out of cash, just like any other business. Now when the customers take these loans and pay interest to the banks, the banks get money to repurchase those bonds and securities or gold. That is why it is called the repurchasing option. The Bank also has the option of borrowing cash directly. But that is at the RBI REPO rate, which today stands at 4.9%.
Explaining the Current REPO Rate Hike of RBI
The Reserve Bank of India has hiked the REPO rate from 4.40% to 4.90%, which is a (50 basis point increase) with effect from 8th June 2022. Likewise, the banks’ lending and deposit rates had a ripple effect, which increased the interest in both lending and deposit rates. As a result, house loan EMIs and fixed deposit interest rates climbed. Fixed depositors are now grinning all the way to the bank since they will be receiving greater interest on their savings. The fixed deposit interest rates stand at 5.50% and 6.25% for senior citizens. However, the home loan or other loan customers would be having to pay more on their EMIs and forced to reduce their expenses on all other payouts and starts becoming thrifty.
READ ALSO: Differences between bonds and debentures.
Reasons for the Hike by RBI
The reason behind this sudden increase in the REPO rate by the RBI is primarily to control inflation. Due to the impact of the Russian-Ukraine war, the cost of necessities has soared in most countries. With crude oil prices climbing, the cost of transportation of farm produce and the cost of all services have increased due to the spiral effect.
It would be important to remind the general public that the RBI had slashed the REPO rate during the COVID-19 pandemic to encourage people to take loans that were being offered at cheap rates. Simultaneously, the fixed depositors were discouraged from storing money in their banks due to low-interest rates in that sector. This, in turn, stopped people from saving and motivated spending so that the market blossomed from its stagnant situation.
The Interest Rates Applied for FDs with reference to the REPO rate hike.
Fixed Depositors enjoy the rise in the REPO rate with a direct effect on their rates of interest on FDs. FDs interest rates are increased or decreased depending on the rise or fall of the REPO rate. As banks earn more interest on home loans on the one side, they pay more to fixed depositors by increasing their interest rates.