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How do RBI rate cuts impact your fixed deposit returns?

By Finserv MARKETS - Aug 28,2019
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How do RBI rate cuts impact your fixed deposit returns

Repo rate is the rate at which the RBI lends money to commercial banks. A repo rate cut allows banks to reduce interest rates for consumers on loans, and lowers equal monthly instalments on home loans, car loans, and personal loans.

Recently, the Reserve Bank of India lowered its benchmark repo rate by 35 bps (basis points) to 5.40%. This was the fourth rate cut so far this year amid a sluggish economy.

In the past three previous monetary policy reviews, the RBI reduced the key policy rates by 25 bps each time in an effort to accelerate the pace of economic activity in the country.

How do RBI rate cuts impact your fixed deposit returns

As a depositor, a falling interest rate means that the new deposits you make earn a lower rate which consecutively means lower returns. The fixed deposits booked at a higher rate continue to give a higher return till the time of maturity.

With the recent cut in the repo rate, banks have started changing their fixed deposit rates. However, it is important to note here that the reduction in deposit rates might not be proportional to the rate cut. Banks use the money collected through deposits to give loans. In the past few quarters, the growth in loans has been faster than the growth in deposits. To feed the growth and demand of credit, banks need to attract depositors and this is the primary reason why often banks do not resort to a reduction in deposit rates that’s strictly in line with the fall in repo rate.

Given the plummeting rates, you need to be prudent and well-informed about liquidity management tactics. For instance, if the investment plan for your bank deposit is medium to long term, now is the right time to lock into a long-term plan. With the consecutive rate cuts and the RBI’s push to address the credit crunch in the country, it is likely that the interest rates on bank deposits are going to decline further.

Last year, the International Monetary Fund released a working paper that predicted that real interest rates in India could decline by more than 150 basis points between 2020 and 2030.

Investing in a non-banking financial institution might be a good choice as usually their interest rates fare better when compared to banks. For instance, you could opt for a fixed deposit from Bajaj Finance Fixed Deposit available on Finserv MARKETS, which is the only Indian NBFC with an international rating of ‘BBB’ by S&P Global.

Bank or fixed deposits provide you with the highest level of safety of your principal amount while also giving you guaranteed returns. It ensures capital protection as well as a uniform flow of income. Most banks offer better interest rates to its senior citizen customers.

In 2018, the RBI announced that more than half of bank deposits were contributed by individuals, who held the highest share across all population groups (rural/semi-urban/urban/ metropolitan) during 2017-18. Total deposits in banks increased from Rs. 1,09.43 lakh crore at in March 2017 to Rs. 117 lakh crore in March 2018. Moreover, the shares of current, savings and fixed deposits stood at 9.7%, 32.1%and 58.2% respectively in March 2018, the data revealed. The bank further highlighted that eight states, namely, Maharashtra, Delhi, Uttar Pradesh, Karnataka, West Bengal, Tamil Nadu, Gujarat and Kerala, accounted for over two-thirds of the total deposits.

The scenario implies that if you do not have the stomach for taking great risks in a volatile market, the time to invest in bank deposits is now. If you dread the complicated documentation procedure and serpentine queues at the bank, you can now avail these services online as well in a hassle-free and efficient manner.

For instance, to open a fixed deposit on Finserv MARKETS, you just need to fill in your personal details along with your nominee’s, choose the amount to invest, tenure and the type of fixed deposit (cumulative or non-cumulative). With minimal documents required, the validation and verification process is also seamless and expeditious. To make it easier for you, it also provides you the option to keep track of your investment on your smartphone anytime, anywhere.

Finserv MARKETS, from the house of Bajaj Finserv, is an exclusive online supermarket for all your personal and financial needs. We understand that every individual is different and thus when you plan to achieve your life goals or shop for the gadget of your dreams, we believe in helping you Make it Happen in a few simple clicks. Simple and fast loan application processes, seamless, hassle-free claim-settlements, no cost EMIs, 4 hours product delivery and numerous other benefits. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere!

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Bajaj Finserv Direct Limited ("BFDL"), erstwhile Bajaj Financial Holdings Limited is a registered corporate agent of Bajaj Allianz Life Insurance Company Limited and Bajaj Allianz General Insurance Company Limited under the IRDAI composite registration number CA0551 valid till 10-Apr-2021. BFDL also renders services to Bajaj Finance Limited (‘BFL’) and Bajaj Housing Finance Limited (‘BHFL’) (referred hereinafter as ‘Lending Partner’) in sourcing of customers, providing preliminary credit support activities, fulfilment services and post-acquisition customer services related to lending business. Registered Office: Bajaj Auto Limited Complex, Mumbai – Pune Road, Akurdi, Pune – 411 035 CIN: U65923PN2014PLC150522