RBI Hikes Repo Rates : Fixed Deposit Interests Rise while Loans get Costlier!

RBI on 4th May 2022 increased the repo rates by 40 bps (basis points). Thus, now the rate stands at 4.40% instead of the earlier 4%. This is based on the liquidity adjustment facility (LAF). Thus, the reason for this hike is to stable liquidity in the Indian financial markets.

This move from the RBI will also help in controlling inflation which is on a high due to increasing crude oil prices as a result of the Russia-Ukraine war. Most importantly, Fixed Deposit rates will increase which are stagnant at around 5%-6% (top limit) for a long time now.

Loans are set to get costlier as the repo rate has increased. For instance, you take a loan of ₹30 lakhs for a tenure of 20 yrs at 6.8% interest and EMI of ₹22,900. Now, the new interest rate will be 7.2% so the EMI will increase by ₹720 which means yearly you will pay ₹8,640 more. This shows the huge impact.

Fixed Deposit enthusiasts can make short-term FDs (upto 1 year) to take benefit of this. The reason is that if you make long-term FDs then the interest rates will not be significantly higher comparatively. This is because, it is seen that when FD interest rates hike, low tenure FDs get higher interests while high tenure ones take time to reach their level.

By how much FD interest rates will increase? Will more investors be driven to FDs now or stick to stock markets, mutual funds, etc.? Do share your valuable views below.