The Reserve Bank of India (RBI) has kept the repo rate unchanged for the seventh consecutive time, at its bimonthly monetary policy committee meeting held on April 5. The previous repo rate hike happened in February 2023 when it was raised from 6.25% to 6.5%. An overall hike of 2.5% in the repo rate before the pause has pushed the interest rates on fixed deposits (FD) to a new high level in the last 4-5 years. The current pause in the repo rate means that depositors can enjoy the prevailing high interest rate on fixed deposits for some more time.
However, how long will this period last? Will the last window in the current rate cycle for depositors to book FDs with higher interest for a longer tenure end soon? Read on to know more.
Though retail inflation has subsided, it still remains a concern
Interest rates on fixed deposits typically follow the direction taken by the RBI in deciding the policy rates. The RBI focuses primarily on retail inflation to decide any action on these rates. The central bank’s decision to start reducing the rates will depend on whether the fall in retail inflation is durable or not. Earlier, higher inflation had compelled it to hike the repo rate in 2022 and 2023. Since then, the inflation scenario has improved a lot. The Consumer Price Index (CPI)-based inflation eased to 5.09% in February from 5.69% in December 2023. However, it is also true that this is the 53rd consecutive week when the retail inflation is still above the RBI’s target rate of 4%. “Even though core and wholesale inflation has significantly eased, the volatility in food prices continues to impinge consumer sentiment. Thus, keeping the headline inflation above the RBI target level of 4%,” says Shishir Baijal, Chairman and Managing Director, Knight Frank India.
Crude oils prices have risen sharply and may delay any interest rate reduction
Crude oil prices have a major influence on global prices of almost all items, and any significant rise in crude oil prices pushes up other prices globally. Oil prices have gone up significantly in the last 4 months to a new high and many analysts expect it to move above $90 per barrel. WTI Crude Oil price, which was below $71 per barrel on January 8 this year, has sharply moved up to $86 per barrel on April 3. If the surge in oil prices continues, it will be difficult for central banks to contain inflation. Any rise in oil prices is going to delay the likelihood of interest rate reduction by the central bank.
10-year G-sec yield is hardening which pushes the rate cut window away
Though G-Sec yields moderated in February, with the 10-Y G-Sec yield ending at 7.08% on February 29 and going down further to 7.014% on March 11. However, it has hardened since then to 7.108% on April 2. This further confirms that interest rates are likely to remain at the current elevated level for a longer period.
Delay in Fed rate cuts – US Fed in no mood to cut rates in near future
Interest rate movement in India also depends on the stance taken by global central banks. The Bank of Japan recently decided to hike interest rates for the first time in 17 years, which has dampened the hope of a rate cut in the near future. “Globally, inflation has remained sticky, led by services and the near-end of global goods disinflation,” says a research report on global strategy by Emkay Global Financial Services.
The US Federal Reserve has also indicated that there was no rush to cut rates amid sticky inflation data. “We argue if it is time to reassess our faith in central banks’ guidance post-pandemic, and take a fresh look at the underlying trends that suggest a constructive growth outlook, sticky inflation, and limited DM easing. We see a high probability of ‘No Fed Cuts’ in 2024, as they struggle to get to the last mile of disinflation,” says the research report.
When will RBI start reducing interest rates?
One thing that looks more certain is that the likelihood of any rate hike is extremely remote. The rate hike cycle has almost ended and it is only a matter of time before the interest rates start falling. However, stubborn inflation is likely to delay the move to cut rates.
“Right now, food inflation is high so the biggest risk going ahead is monsoon. IMD has forecast normal monsoon for the year, so timely kharif sowing can bring down food inflation. Till then, the RBI is unlikely to cut interest rates,” says Shraddha Umarji, Economist-Institutional Research at Prabhudas Lilladher.
Robust economic growth despite stubborn inflation will help the RBI delay the onset of rate reduction. “The economic growth as well has continued to remain strong as witnessed in the above-expectation GDP growth during Q3 FY’24. Strong growth would continue to provide adequate support for the RBI to keep policy rates unchanged for the next few months,” says Baijal.
Any possibility of a rate hike appears at least 3-6 months away. A research report called “Recap 2024 . Crystal Gaze 2025” by Pantomath Financial Services Group says, “The Reserve Bank of India (RBI) might consider rate cuts in the second half of FY2025, contingent on overall inflation and the monetary policy stances of global central bankers.”
Global central banks’ action will also have an influence on the RBI’s rate cut action. “The central bank will also take cues from what the Fed and ECB are doing when it comes to rates. So it is unlikely that rate cuts will happen before October. However, the RBI could change its stance to ‘neutral’ in June or August,” says Umarji.
What should fixed deposit investors do in the current situation
While some banks may yet raise their FD rates, any significant hike looks unlikely. A reduction in rates is only a matter of time; the question is whether it will happen in 3 months or after that. Therefore, the current interest rates on FDs can be considered very close to the recent peak in the current interest rate hike cycle.
This may be the last window in a long time for you to deploy your FD deposits at the prevailing high interest rates. If you have a high risk appetite, go for deposits in small finance banks. Many of these have been offering high interest rates. Some offer an interest rate of 9% to general citizens and 9.5% to senior citizens. However, remember not to go overboard with FDs in small finance banks.
It is better to keep your exposure within the insurance limit of Rs 5 lakh. For higher deposits, use different types of account in different capacities, which will make you eligible for the Rs 5 lakh cover separately on each account.
Whenever FD rates start falling, it will be the short- to medium-term interest rates that will be impacted first. So, if you have surplus funds to invest for the small to medium term (up to 3 years), then you may book FDs now or do it at least within the next 2-3 months.
The impact on long-term FD rates is likely to be slower and also in a lower quantum. Therefore, you may get a bigger window to book a long-term FD at current higher rates. However, the longer you wait, the higher the risk of falling rates.
