The Reserve Bank of India (RBI) has already cut the repo rate twice this year—by 25 basis points each in February and April, bringing the key policy rate down from 6.50% to 6.00%. With the Monetary Policy Committee (MPC) scheduled to meet between June 4 and 6, market consensus strongly anticipates a similar cut, in order to rein in inflation and support the country’s economic growth.

Repo rate changes have tangible effects on fixed deposit (FD) interest rates and savings behaviour, but the timing of impact varies between banks and non-banking financial companies (NBFCs). Public and private sector banks have already trimmed their FD rates by 10 to 50 basis points since the first cut in February, aligning their deposit products with the lower cost of funds. The April cut accelerated this trend, with some banks reducing FD rates by up to 70 bps across various tenures.

Savings account interest rates have also seen downward adjustments. NBFCs, on the other hand, have shown a more nuanced response: some continue to offer relatively higher FD rates to attract depositors in a competitive environment, while others have begun adjusting rates in anticipation of further easing.

In this article, we take a closer look at how repo rate movements influence FD rates and savings behaviour in India.

The Link between Repo Rate and FD Returns

Historically, FD rates do not adjust instantaneously with repo rate changes, but a consistent pattern emerges after major policy moves.

• With repo rate hikes, borrowing costs increase, and financial institutions look to attract deposits by offering more competitive FD rates. This benefits conservative investors seeking safe returns.
• Savers often respond by shifting money from low-interest accounts or volatile assets into FDs to lock in attractive rates.
• With repo rate cuts, in order to manage lower borrowing costs, financial institutions often cut FD rates, making them less appealing for investors focused on fixed income.
• There’s also a noticeable investor mindset shift as a sustained low-rate environment can drive savers to explore mutual funds, stocks, or other instruments offering higher potential returns.

Why FD Interest Rates Don’t Always Move in Sync

While there is a connection between repo rate changes and FD interest rates, the movement isn’t always immediate or proportional. Here’s why:

Lag in Transmission

The term “transmission lag” refers to the delay between a change in the repo rate and its impact on deposit or loan rates. Several factors influence this delay:

• Financial institutions assess internal cost structures and liquidity positions.
• Competitive strategies differ across institutions.
• Existing FDs continue at locked-in rates until maturity.

Market Liquidity

If financial institutions are already sitting on a healthy cash surplus, they may not be in a hurry to revise deposit rates upward, even after a repo rate hike. Similarly, in tight liquidity situations, they might raise deposit rates despite a stable repo rate.

Senior Citizens and the Repo Rate Connection

Senior citizens in India often depend on FDs as a primary source of regular income. Since they typically receive an additional interest benefit on FDs, slightly higher than the standard rate, the repo rate's influence on deposit returns becomes even more relevant to them.

For this segment, stability and predictability matter most. Hence, staying aware of repo rate movements helps them plan better, whether by locking in higher FD rates during peak cycles or adjusting savings strategies when returns begin to slide.

Strategies for Investors Amidst Repo Rate Changes

Since repo rate changes affect FD rates and returns, here are some practical tips for investors to consider:

• Monitor RBI announcements regularly: Policy reviews usually offer cues about upcoming rate changes.
• Use a laddering approach: Splitting deposits into multiple tenures can balance risk and opportunity.
• Avoid locking in long-term FDs during rate cuts: Opt for short-term deposits until better rates return. When the RBI does repo repo cuts, avoid locking in long-term FDs at declining yields. Shorter tenures for FDs allow flexibility to reinvest at higher rates when the cycle reverses.
• Evaluate alternative savings options: Senior citizen saving schemes, post office deposits, or select mutual funds may offer better returns depending on your risk tolerance.

The Introduction of Repo-Linked Fixed Deposits

Traditionally, FDs have offered static interest rates - locked in at the time of booking, unaffected by subsequent monetary policy changes. But with increasing financial sophistication and the RBI’s push for faster rate transmission, banks and NBFCs in India are now introducing repo-linked FDs, a useful alternative for investors who prefer more responsive returns.

What Are Repo-Linked FDs?

Repo-linked FDs are deposit instruments where the interest rate is directly tied to the RBI’s repo rate, often with a defined spread. So, if the RBI increases the repo rate, your FD interest automatically adjusts upward. Conversely, a rate cut could reduce the return.

This is a marked shift from conventional FDs, where your interest rate stays the same throughout the tenure, regardless of policy shifts. For investors who want their savings to stay aligned with broader macroeconomic movements, this option introduces a new level of flexibility and inflation responsiveness.

Conclusion

As the RBI prepares for its June MPC meeting, the likely continuation of rate cuts signals a sustained low-interest-rate environment. For investors and savers, this means FD returns may compress further, reinforcing the need for diversified savings strategies and proactive action.

FAQs

What happens to my existing FD if the repo rate is cut?

If you already have an FD, your interest rate remains unchanged until the maturity of your deposit. A repo rate cut only affects new deposits or those renewed after maturity.

How can a repo rate cut affect my other investments?

While the repo rate cut mainly affects FD rates, it can also make equity markets and mutual funds more attractive as lower interest rates often lead to higher liquidity, benefiting riskier investments.

Should I invest in repo-linked FDs for better returns?

Repo-linked FDs offer rates that move with the repo rate, so if the RBI increases rates, your returns will rise. However, if you prefer stability, traditional FDs might suit you better.

What is the difference between a fixed deposit and a repo-linked FD?

A fixed deposit offers a fixed interest rate for the entire tenure, while a repo-linked FD adjusts its interest rate based on the RBI’s repo rate movements.

How soon do banks adjust their FD rates after a repo rate change?

The timing varies. Some financial institutions adjust their rates immediately, while others may take several weeks depending on their liquidity needs and market strategy.