How interest rate changes from the RBI can impact your savings

With two drops in the repo rate in 2019, the rate at which the RBI lends to commercial banks stands at 6% with a total deduction of 50 bps. While this means that banks can obtain credit from the RBI at a lower rate, it also has an effect on your finances. Take a look at how the change in the repo rate impacts your savings and what you can do to minimise any losses.

The effect of the repo rate change on your savings

As some banks have linked bank savings accounts to repo rates, the recent decrease in repo rates can mean a lower interest rate on your savings account. Though this is for those accounts that hold over Rs.1 lakh, it is a big hit as savings account in any case offer lower interest rates and so you only stand to gain from interest when you have a substantial amount in your savings account.

The effect of the repo rate on fixed deposits

As the repo rate plays a part in determining the offered interest rate on fixed deposits, it is likely that the FD rates of interest fall as repo rates fall too. Despite the fact that banks attempt to encourage deposits, since borrowing from the RBI becomes cheaper, loan interest rates fall and so do interest rates on fixed deposits.

This can be disappointing as fixed deposits had started to offer higher interest rates and returns in the recent times. In fact as of 2018, fixed deposits yielded an average return rate of 6.25% while debt funds yielded 5.5% to 5.9% and equities gave an average of 2.7%.

How to grow your savings

One way to move towards the continuous growth of your funds is by booking deposit rates while they are on the high and locking in on these FD rates for as long as you can. While you must ensure you aren’t compromising on liquidity, you can choose to deposit with an NBFC offer high interest rates to make substantial returns.

One such issuer, Bajaj Finance offers interest rates as high as 8.60% on deposits of 3 years or more with payout on maturity and this FD rate increases to 8.95% for senior citizens. Further, you can gain from additional interest of 0.25% upon renewal and enjoy security of your funds too.

Now that you know how the change in repo rates can affect your savings, grab the opportunity to lock in on high returns. You can also use a fixed deposit interest calculator to ladder your FDs for continuous liquidity over time.