The increase in repo rate in India, brought smiles on the faces of many risk-averse investors who invest in fixed deposits, recurring deposits, and other traditional investments. The bond yields are primary indicators of a change in interest rates. For the past many months interest rates on 10-year government securities has been steadily rising.
Bond yields have increased from 6.675% to 7.75% in the past year and G-Sec yields could soon cross 8%. Therefore, it is safe to say that banks will increase fixed deposit rates in the coming days.
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The last time Reserve Bank of India (RBI) went for back-to-back repo hikes in the bi-monthly policy meet was way back in 2013. The RBI has hiked the repo rate from 6% to 6.5% in the last two bi-monthly policy meets. The repo rate in India now stands at 6.5%. Earlier, RBI had hiked the repo rate from 6% to 6.25% on June 6th 2018.
The triggers for the back-to-back repo rate hike are mainly rising oil prices and inflation. In May 2018 retail inflation was 4.9% which rose to 5% in June 2018. Increasing fuel prices and food items contributed to an increase in inflation. Also, an increase in the minimum support price (MSP), trade war and 7th central pay commission’s house rent allowances (HRA) had a significant impact. How will this impact common people like you and me? The increase in repo rate has an impact on both borrowers and depositors.
Repo rate is the rate at which the RBI lends to commercial banks. The increase in the repo rate means the RBI charges a higher rate of interest to commercial banks. Banks in turn charge higher interest to borrowers.
While an increase in repo rates is bad news for borrowers, it can be good news for depositors. Increase in repo rate leads to an increase in interest rates on both, loans and deposits.
As repo rates rise, banks offer higher interest to depositors. Therefore, an increase in repo rates will not only hike interest rates on loans, but it will also lead to a hike in interest offered on Fixed Deposits, Small Saving Schemes and so on. SBI has already increased fixed deposit rates by 10 basis points on July 31st 2018, even before the hike in repo rate was declared. This will benefit senior citizens who live on interest income. Thus, interest rates on Fixed Deposits and Small Savings Schemes will increase.
After the first repo rate hike in June, two more increments in repo rate were anticipated. This prompted lenders to raise rates.
SEE ALSO: What is a Corporate Fixed Deposit?
Loans are bound to get costlier with the hike in repo rate. After the first repo rate hike in June, banks like SBI increased their MCLR. Most other banks followed.
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