RBI Repo Rate Reforms: Does it Affect Your Fixed Deposit Interest Rate?

May 01, 2025

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On 9 April 2025, the Reserve Bank of India (RBI) cut the repo rate by 25 basis points bringing it down to 6%. This marks the second repo rate cut this year, under the supervision of the new RBI Governor Sanjay Malhotra. The rate comes at a time as the Indian economy grapples with a host of challenges, including a 26% tariff imposed by the US Government on Indian exports.

 

Understanding the Repo Rate

The repo rate is the interest rate at which the RBI lends money to commercial banks. A reduction in this rate lowers the cost of borrowing for banks, which can lead to decreased interest rates on loans and deposits for consumers.

 

What Does the Repo Rate Cut Mean for your Fixed Deposit?

First things first. If you have booked your Fixed Deposit (FD) before the repo rate cut, your interest rate would remain unchanged, even if the bank decides to reduce the rate after rate cut. FD interest rates remain locked throughout the deposit tenure. So, the interest rate promised to you at the time of opening the account would remain as is – no change whatsoever.

 

That said, the recent reduction in the repo rate may have a significant impact on both borrowers and savers. Those with loans, such as home, auto, and personal loans, are likely to benefit from reduced EMIs. On the other hand, savers, especially those who rely on fixed deposits (FDs), may see a decline in their returns as banks lower interest rates on deposits. However, the reduction in FD rates post repo rate cut is at the sole discretion of the bank. Check with your bank to know the latest FD rates.

 

Here’s a summary:

  1. Reduction in FD Interest Rates: Banks are likely to lower FD interest rates to align with the decreased cost of borrowing. This means new FDs may offer lower returns compared to previous rates. But this depends entirely on the bank's policies and decision. Check with your bank to know the latest interest rates.
  2. Impact on Existing FDs: If you have an existing FD with a fixed interest rate, your returns will remain unaffected until maturity. However, upon renewal, the new interest rates will apply, which may be lower.
  3. Senior Citizens: Senior citizens, who often rely on FDs for regular income, may experience a decrease in interest income due to the anticipated reduction in FD rates. 

 

Strategies to Mitigate the Impact

To navigate the changing interest rate environment, consider the following strategies:

  1. Lock in Current Rates: If you're planning to invest in an FD, doing so promptly can help you secure the existing higher rates before banks implement reductions.
  2. Diversify Investments: Explore alternative investment options such as debt mutual funds, bonds, or other fixed-income instruments that may offer better returns. However, assess the associated risks and consult with a financial advisor before making decisions.
  3. Laddering Strategy: Invest in multiple FDs with varying maturities. This approach provides liquidity at different intervals and reduces the risk of reinvesting all funds at potentially lower interest rates in the future.

Final Thoughts

While the RBI's repo rate cut aims to boost economic activity by making borrowing cheaper, it also signals a potential decrease in interest income from fixed deposits. Investors should stay informed about interest rate trends and consider diversifying their investment portfolios to optimize returns.

 

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FAQs

1. What is the current repo rate after the recent cut?

As of April 9, 2025, the repo rate is 6%.

2. How soon will banks adjust their FD interest rates following the repo rate cut?

Banks may adjust their FD rates within a few weeks after the RBI's announcement, but the exact timing can vary.

3. Will existing fixed deposits be affected by the rate cut?

No, existing FDs with fixed interest rates will remain unaffected until maturity.

4. Are there alternative investments to consider amid falling FD rates?

Yes, options include debt mutual funds, government bonds, and corporate bonds. Each comes with its own risk profile.

5. What is a laddering strategy in FD investments?

Laddering involves investing in multiple FDs with different maturities to manage interest rate risk and maintain liquidity.

6. How does the repo rate cut affect loan interest rates?

A lower repo rate can lead to reduced loan interest rates, making borrowing cheaper for consumers.

7. Why does the RBI cut the repo rate?

The RBI cuts the repo rate to stimulate economic growth by encouraging borrowing and investment.

8. Can FD interest rates increase in the future?

Yes, FD rates can rise if the RBI increases the repo rate in response to economic conditions.

9. Is it a good time to invest in long-term FDs?

Investing in long-term FDs now can lock in current rates, but consider the possibility of future rate changes.

10. How can senior citizens manage reduced FD interest income?

Senior citizens might explore senior-specific savings schemes or diversify into other low-risk investments to maintain income levels

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