How a rate change reaches you

The chain from policy to your account

The central bank sets a policy rate — the rate at which it lends to banks. Everything else is downstream of it, and each step adds a delay.

1. The policy rate changes.
2. Banks' own cost of funds changes, though not immediately and not by the same amount — much of their funding is existing deposits at rates already fixed.
3. Lending rates change. For loans linked to an external benchmark this is now fairly direct, and resets happen on a mandated frequency.
4. Deposit rates change, at the bank's discretion and on its own timing.

Steps three and four are where the asymmetry lives, and it is worth being precise about why.

Why loans reprice faster than deposits

Two structural reasons, neither of which requires anyone to behave badly.

Floating loans are contractually linked; deposits are not. A loan tied to an external benchmark must reset on a set frequency — the movement is automatic. A savings rate is set by the bank and a fixed deposit rate is fixed for its term, so an existing deposit does not reprice at all until it matures.

The stock differs from the flow. When rates rise, the bank's entire floating loan book reprices upward more or less at once. Its deposit book reprices only as deposits mature and renew — so the funding cost rises gradually while lending income rises quickly.

The consequence for a household: a rate rise reaches your EMI faster than it reaches your deposit rate, and a rate cut reaches your deposit rate faster than it reaches your EMI. Both directions run against the customer, and the mechanism is contract structure rather than intent.

Where it shows up on a floating loan

On a rate rise, most lenders adjust the tenure rather than the EMI — so the monthly payment looks unchanged and the loan quietly gets longer. Where the remaining tenure cannot absorb the increase, the EMI is raised instead, often as a surprise.

Two habits follow, both covered in the home loan guide. Check the outstanding tenure after every rate change, not just the EMI. And on a rate cut, consider keeping the EMI where it is so the tenure shortens instead — the same reduce-the-tenure logic that applies after a prepayment.

Also worth remembering that your rate is a benchmark plus a spread fixed at origination. A rate that has drifted above what your lender offers new borrowers is usually a spread problem rather than a benchmark one, and it is fixable.

Where it shows up on savings

Savings account rates are deregulated, so banks set them competitively and change them when they choose. Fixed deposit rates apply from the date you book — an existing deposit is unaffected by later moves in either direction, which is precisely what you bought.

That produces a decision at the moment of booking, and it is a judgement rather than an arithmetic one:

• If rates look high relative to recent history, locking a longer tenure secures that rate for longer.
• If rates look low, shorter tenures avoid committing at the bottom.
• If you have no view — which is the honest position most of the time — ladder across maturities. Something matures regularly, reinvestment is spread across environments, and you never have to be right about the direction.

Laddering is the answer that does not require a forecast, which is why it survives contact with reality better than the other two.

The same move, different instruments

The debt fund row is the one that surprises people, and it is the same economics as the deposit — with one difference. A deposit is not marked to market, so an existing one looks unaffected while it is in fact now below-market. A debt fund shows the same hit immediately, because it values its holdings daily. Same event, opposite visibility.

How much a debt fund moves is given by its modified duration, which converts a rate change into an expected percentage move.

What to actually do with this

• Do not try to time rates. Professional forecasters get direction wrong regularly, and a household plan that depends on the call is fragile.
• Ladder deposits rather than taking a view.
• Match debt fund duration to your horizon, which makes rate moves largely wash out.
• Check your loan spread annually. The highest-value fifteen minutes available to a borrower, and it has nothing to do with where rates are going.
• Keep the EMI constant when rates fall, so the tenure shortens.
• Remember what real returns mean. A high nominal deposit rate alongside high inflation may be a worse real outcome than a lower rate in a calmer period.

That last point catches people in both directions, and it is the one that matters most over a long holding period.

Seeing it in the data

How debt funds actually behaved through past rate cycles is history rather than theory, and it is inspectable.

FNOTrader's Mutual Funds app carries the full AMFI NAV history — around 34 million NAV rows — so a fund's worst drawdown during a rising rate period, and how long it took to recover, can be read directly. For money being compared against a deposit, those two figures describe the trade far better than a yield does.

Common questions

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