FDs, small savings interest rates to go up as RBI hikes repo rate again

The Reserve Bank of India (RBI) on Friday raised its key lending rate -- repo rate -- by 50 basis points (bps) to 5.40 per cent. Although the move would end up hurting the loan borrowers as they have to shell out more in the form of EMIs (equated monthly instalments), there's also some sort of respite for those who want to park their money in fixed deposits (FDs) and other small savings schemes.

In this situation, FDs and other small schemes could now fetch better returns as they stayed at the lower levels for many years due to the pandemic.

The Reserve Bank has raised repo rate by 140 bps in three consecutive rate hikes -- 40 bps in May; 50 bps in June and August, respectively.

Banks usually raise interest on deposits after the central bank hikes repo rate.

"The latest move made the borrowing expensive leading to an increase in loan tenure and EMIs higher. However, the interest rates on deposits, which were trending on the lower side for several years, will see a rise. So as a customer, you will get higher interest on your fixed deposits," said Adhil Shetty, CEO, Bankbazaar.com.

Also, there are "chances" that other small savings interest rates could rise too.

"Chances are that small savings interest rates may also go up. Senior and very senior citizens will get additional 25 basis points to 50 basis points than general citizens annually. However, you may not see the increase immediately. The banks are expected to raise deposit rates in a staggered way to ensure that their cost of funds doesn't escalate drastically," the Bankbazaar chief executive added.

For better returns, one should go for "laddering" investments and opt for shorter tenures.

"As interest rates are on an upward track, it is best to ladder investments and invest them for shorter periods so that you can reinvest them on maturity to get higher returns," said Pankaj Bansal, Chief Business Officer, Bankbazaar.com.

Laddering will also take care of liquidity issues and provide you with regular returns periodically, he added.