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The decision to cut the repo rate is likely to be taken in the RBI meeting to be held from 3 to 5 December. Experts say that RBI can cut the interest rate by 0.25% to 0.50%. If this happens, banks may reduce fixed deposit (FD) interest rates in the coming days.

So, if you are planning to open an FD in any bank these days, then do not delay. If banks reduce interest rates, you will get less interest on your FD. Before taking this story further, let us understand what is repo rate and what is its connection with FD rate. Repo rate is the interest rate at which RBI (our Central Bank) lends money to banks.

What will happen if RBI reduces the repo rate?

Banks start getting cheap money from RBI. Suppose you used to pay 5.5% earlier, but now you have to pay 5%. Now, banks have cheap funds. Therefore, they want to reduce borrowing from people by giving higher interest rates on FD. Due to low repo rate, banks reduce FD interest rates. Earlier, 6.5% was available on FD, but now they can offer 6%. Keep these 3 things in mind while investing in FD.

1. It is important to choose the right time,

Before investing in FD, it is important to consider its timing. This is because if investors withdraw money before maturity, they will have to pay a penalty. A penalty of up to 1% may be imposed on breaking the FD before maturity. This may reduce the total interest received on the deposit.

2. Do not invest all your money in a single FD

If you are planning to invest ₹10 lakh in a single FD in a single bank, then instead invest in 8 FDs of ₹1 lakh each and 4 FDs of ₹50,000 each in multiple banks. This way, if you need money in between, you can break the FD as per your need and arrange for the money. Your remaining FD will remain safe.

3. Tax exemption is available on 5 year FD

5 year FD is called tax-saving FD. By investing in these, you can claim exemption of ₹ 1.5 lakh from your total income under Section 80C of the Income Tax Act. Simply put, you can reduce your total taxable income by up to ₹1.5 lakh through Section 80C.