RBI repo rate
Repo is a transaction where the Reserve Bank of India (RBI) buys back or repurchases (hence, repo) securities lent to banks at a fixed price. The price for each security is affected by the repo rate. The transaction is relevant for banks when they need funds from the RBI. This is like the central bank lending money to banks at the pre-determined repo rate. As most monetary transactions in an organised economy get routed through banks, a change in the repo rate eventually impacts all saving and lending action.

A high repo rate means that banks borrow funds from the RBI at a relatively higher rate. As cost of funds increases, it gets passed on to companies and savers like you, in the form of higher lending rates. In tandem, deposit rates by banks also increase to keep customers interested; banks need deposits to keep on lending.

Similarly, the government offers deposits to individuals in the form of small savings certificates such as Kisan Vikas Patra and PPF. The government can afford to pay an interest on these due to earnings from sources like repo rate (banks pay the government an interest at the repo rate for funds borrowed). As the repo rate shrinks, the government's earnings and its ability to service the savings schemes also shrinks. Thus, with lower repo rate over a period of time, small savings rate too is likely to come down.

Inflation, growth
The RBI uses repo rate as one of the ways to check money supply in the economy, and manage inflation and growth. As bank lending and deposit rates impact corporate investments and individual savings, changes are critical to overall economic growth. Usually, high growth is followed by high inflation, and vice versa.

Inflation is essentially the rate of change in prices of goods and services. When it is high, the value of your money decreases fast, and this is compensated a bit by higher interest rates in the economy. When inflation is low, the value of your money is better preserved and falling rates don't really have a bad impact.

What you have to measure is the real rate of return, which is the offered interest rate less inflation. Today, at an inflation rate of about 4.5% per annum, your real rate of return for an interest rate of 6.5% is 2%. In 2014, when bank deposit rates were at 8-8.5%, inflation index was also at 7.5-8%. So the real return was relatively lower.

Another factor is government earnings from other sources like taxes. If these earnings are affected, which happens when the overall economic growth slows down, there could be a need to bring down interest costs for the government. This too can lead to a cut in small savings rate.

SIPs are when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich

For further information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com