Is it time to break your FD? | RBI increased repo rates impact on Home Loans & FD | Pavan Sathiraju
71How to estimate the differential interest rate on which you need to pay penalty?
Example,
1) Assume you started a Fixed deposit for 5 years in 2022 & you are getting paid 6.5% interest rate (for the whole 5 year period).
- When you were starting the FD, the interest rate on 5 year FD is 6.5%.
- Also, the interest rate on a 1 year FD would have been between (5 to 6%). Which is less than 6.5%
2) It means, you are already paid for the entire 2022 at the interest rate of 6.5%.
Now, if you are breaking the FD. The bank will say that - "I assumed you were going to continue for 5 years, hence I was ready to pay 6.5%.
For everybody else, who promised to keep the money for only 1 year - I paid them interest between 5 to 6% only.
So, I paid you extra interest.
PLEASE, PAY ME BACK THAT EXTRA INTEREST!
P.S. That 5-6% interest amount is not random. It is the rate bank was giving to 1 year FD's at the time you were getting started:)
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RBI has increased the Repo rate by 25 basis points or 0.25%. This has several implications which range from an increase in the cost of bank loans to an uptick in fixed deposit returns, etc. In this video, I’ve covered what is repo rate and how it will impact the market in the coming months. For example, if HDFC is giving loans at a 10% interest rate while it is paying depositors 6% interest on their deposits with HDFC then is earning 4% money in the transaction. HDFC can get funds to give out loans from depositors and also from RBI. When RBI gives loans to the banks, it also charges them a certain interest rate. This is known as the repo rate. This repo rate has been increasing constantly.
In 2022 RBI used to charge 4% as the Repo rate while today it is charging 6.5% as the repo rate. Last month it was 6.25% and now it is 6.5%. Now banks like HDFC have to pay more to borrow money from the RBI. Since HDFC will also try to generate a profit, they will also increase the interest rate on loans. Because of this, we can say the interest on student loans, and home loans, are going to increase and so will the monthly EMIs we pay. Now since banks have two main sources of funds which are borrowings from RBI and from depositors - the fight for depositor funds is going to intensify since the cost of borrowing money from RBI is increasing.
Because of this, the interest rate on deposits offered by banks such as FD returns rates are going to increase. So this will increase the returns on deposits as well as the amount to be paid in EMIs. Implications for these changes in common people are explained further. If someone had done a fixed deposit of 10,00,00 at an interest rate of 6% then they will be earning close to ₹60,000 per annum. But if the interest is increased from 6% to 7.25 percent, then the extra money that one can earn on a fixed deposit would be 12,500.
This will be the extra income generated on a yearly basis. So what happens, in this case, is that someone who had done a fixed deposit for a period of 5 years would go to the bank and break their FD before maturation. The fine they’d have to pay would be 1% of the total amount put into FD and the extra interest given on FDs. If the difference of interest given on normal deposits and FD is 0.5% then the total amount to be paid in the penalty for breaking an FD of 10 lakhs will be ₹15,000. But if the same amount is put into an FD today, it will generate an extra 12,500 every year. For your FD, you should check if the benefit is positive or not if you do the same thing.
Coming to home loans, if someone is paying an EMI of ₹40,000 then this amount will increase. If the repo rate increases by 0.25% then this will lead to EMI being increased to ₹42,400. If you’re not taking advantage of the repo rates in FDs then you’ll be in a net loss position.
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I publish meaningful and valuable content on this channel. My aim is to make business news more accessible and easy to grasp. If you find my videos informative and insightful then make sure to subscribe and leave a comment. I’ll see you in the next video
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Chapters
0:00 - Intro
0:24 - Pointers
0:35 - What is the Repo rate?
2:09 - The increasing Repo rate
3:23 - Fight for depositors
4:00 - Implications for common people
8:23 - Home loan
10:11 - Outro