The Reserve Bank of India (RBI)’s, April 2025 Monetary Policy Statement projected inflation easing to 3.2% (well within the 4% target) and signaled continued accommodative policy to support growth, implying further deposit rate softening in coming quarters.

The repo rate is a powerful tool that impacts the entire financial landscape, from inflation control to borrowing costs. While most of the discussion around the repo rate revolves around loans and borrowing, its influence extends far beyond that, directly affecting the returns you earn on your savings and fixed deposits. For anyone with money invested in a savings account or a fixed deposit, understanding the connection between the repo rate and bank deposit rates is essential.

In this blog, we’ll explore how changes in the repo rate ripple through the banking system, ultimately impacting the interest rates that banks offer on deposits.

Understanding Repo Rate Changes

The repo rate is the interest rate at which the RBI lends short-term money to financial institutions against government securities. This is a crucial part of India’s monetary policy toolkit.

When inflation rises or the economy overheats, the RBI increases the repo rate to make borrowing costlier and reduce the money supply. Conversely, during slowdowns, the repo rate is reduced to inject liquidity and spur spending.

Though this rate directly governs interbank borrowing, it ends up influencing a whole spectrum of interest rates in the economy, including those offered on your deposits.

Understanding Bank Deposit Rates

Bank deposit rates refer to the interest that financial institutions offer customers for parking their money in different types of accounts, primarily savings and fixed deposits.

These rates are not arbitrary. They are set after analysing a range of factors, such as:

• The cost of funds for the bank or non-banking financial companies (NBFCs)
• Liquidity in the banking system
• Inflation expectations
• RBI’s policy direction (including repo rate)
• Competitive pressure from other financial products

The two main types of deposits influenced by repo rate shifts are:

• Fixed deposit rates: Typically offer higher returns for locking in funds over a period
• Savings interest rates: Offer liquidity, but usually with lower returns

How Repo Rate Shapes Deposit Rates

The connection between repo rate and deposit interest is subtle but significant. Here’s how it works:

Cost of Funds and Repo Rate

Financial institutions decide what they pay on deposits based on how expensive or cheap it is for them to source funds elsewhere.

• When the repo rate is low, they can borrow money from the RBI at a cheaper rate. This reduces the need to attract deposits aggressively. As a result, they offer lower interest on deposits.
• When the repo rate is high, borrowing from the RBI becomes costlier. Banks or non-banking financial companies then rely more on public deposits and offer better interest rates to attract savers.

Liquidity Conditions

During phases of high liquidity (when money is easily available), institutions don’t need to offer high interest to gather deposits. A lower repo rate usually corresponds with high liquidity, so deposit rates tend to soften.

In tight liquidity conditions—often following a repo rate hike—financial institutions boost deposit rates to secure funds.

Why Do Bank Deposit Rates not Change Instantly?

You might notice that deposit rates don’t react overnight to repo rate changes. Here’s why:

Deposit Planning Cycles

Financial institutions work on internal funding strategies. If they’ve recently raised funds through long-term deposits or bonds, they may not need to revise rates immediately.

Rate Transmission Delays

Monetary policy changes don’t always flow through the system instantly. Even the RBI acknowledges this lag, often called transmission delay. It can take weeks or months before a repo rate change shows up in your FD returns.

Market Competition

In a highly competitive environment, some banks or NBFCs may not reduce rates right away, especially if they want to retain or grow their customer base. Others might pass on the benefit or burden faster to stay ahead.

What to Do When Deposit Rates Fall?

Falling deposit rates can hurt long-term savers, but there are strategies to stay ahead:

Use FD Laddering

Spread out your fixed deposits across different maturities. This cushions against rate volatility and offers liquidity.

Diversify into Other Instruments

Explore options like:

• Government-backed small savings schemes
• Debt mutual funds
• Short-duration bonds

Keep Reviewing

Don’t treat deposit decisions as one-time. A half-yearly review of repo rate trends and deposit rates can keep your savings on track.

Conclusion

As the RBI continues to manage inflation and economic growth through repo rate changes, both savers and borrowers must remain agile, adjusting their strategies to optimise returns and minimise costs. Understanding the repo rate impact is key to making smarter financial decisions, and in doing so, securing a more prosperous future. As an investor, it’s a good idea to lock in competitive interest rates before the effect of the repo rate cuts trickles down to financial institutions.

FAQs

Why don’t all deposit rates increase when the repo rate rises?

Rate hikes are often passed on selectively. Factors like liquidity conditions, internal fund requirements, and competition shape how quickly banks or NBFCs adjust deposit rates.

Are savings interest rates linked to the repo rate?

Savings account rates move more slowly and less frequently in response to repo rate changes compared to fixed deposit rates, due to their low-cost nature and liquidity features.

How long does it take for deposit rates to change after an RBI announcement?

It can vary from a few days to several weeks, depending on the financial institution's strategy and the magnitude of the repo rate change.

Should I break my FD if the repo rate increases?

Not always. Consider how much time is left in your FD, the penalty for premature withdrawal, and the revised rate you’ll receive before making a decision.