The RBI (Reserve Bank of India) has had five consecutive rate cuts and has now put a stop to it. In its latest monetary policy, the central bank in India had kept the repo and the reverse repo rates unchanged. Shaktikanta Das, the RBI Governor, has said that although the central bank is not in a hurry to reduce interest rates anymore, it would henceforth work to ensure that the transmission would become more effective as much needs to be passed on to customers in the system.
The RBI had stated that after the external benchmark system was introduced, most banks had since then linked their lending rates to the policy repo rate of the Reserve Bank. The median term of the deposit rate has gone down by 47 bps during the period between February- November 2019. The weighted average term deposit rate had declined by 9 bps in October alone as against a reduction of 7 bps in the eight months between February to September. This augurs well for further transmission of lower lending rates.
Key aspects worth keeping in mind
The repo rate is presently at 5.15% and the reverse repo rate is 4.90% and in its last monetary policy review, the key policy rates were cut by the central bank by 25 basis points, with the calculation being 100 basis points = 1 percent. Since February 2019, there has been a repo rate reduction of 135 bps.
With this, let us see how it is going to be effect FD investors and borrowers.
Since the beginning of the year, the banks, along with cutting interest rates on loans have also been reducing the interest rates on FDs as well. The SBI interest rate on an FD for one year on November 2019 is 6.25% and for senior citizens it was 6.75%. In August, these same FDs were 6.8% and 7.3% for senior citizens. So there was a 50 bps cut in a matter of three months only. The senior citizens were hit the hardest by these falling FD rates and with FDs earning less than similar fixed income investments, financial planners are also advising senior citizens to invest in smaller savings schemes like post office term deposits or Senior Citizen’s Savings Schemes. It remains to be seen whether banks transmit more benefits to borrowers in terms of lower home loan interest rates on the basis of previous repo rate cuts by the RBI.