RBI MPC Decisions: RBI MPC Announcements on April 5: FD Investors Likely to Get More Time to Book Fixed Deposits at Current High Interest Rates; All eyes are on RBI

Investors who invest in Fixed-term deposits (FDs) have had a dream run in the last two years. Thanks to the increase in the repo interest rate, interest rates on fixed deposits at well-known public and private banks are at 8%. Several small finance banks even offer an interest rate of around 9% on FDs. For senior investors, the interest rate on FDs reached 9.5% at one point. After hitting historic lows by April 2022, FD interest rates have increased manifold, making it an attractive investment option for many.

Now the question arises: How long can one get such high interest rates on FDs?

With the first meeting of the Monetary Policy Committee (MPC) of the new financial year Reserve Bank of India (RBI) is scheduled for this week. All eyes are on regulators to get an idea of ​​what the future holds for FD investors. Shaktikanta Das, Governor of the Reserve Bank of India, will announce the decisions of the RBI MPC on March 5, 2024.

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We spoke to several experts to understand how FD interest rates are likely to change in the next few months and how FD investors can make the most of this scenario.

RBI MPC: The RBI is expected to keep the repo rate unchanged at 6.5% in April 2024

The repo rate is one of the main factors that determine the interest rates of fixed deposits. If the repo rate rises, FD interest rates usually increase. Likewise, FD interest rates usually fall when the repo rate is reduced.

The RBI has kept the repo rate unchanged at 6.5% since February 2023 to keep retail inflation in India within its target range of 2% to 6%.

Will the central bank cut the repo rate in April monetary policy?

In response, Jahnavi Prabhakar, economist at Bank of Baroda, says, “The monetary policy committee is likely to maintain the repo rate and maintain the 'withdrawal of accommodation' stance in the upcoming RBI policy meeting.”

This first RBI-MPC meeting of this financial year comes against the backdrop of stronger than expected economic performance, despite pressures in certain segments of the economy. On the growth front, the third quarter GDP figures show that the economy accelerated by 8.4% compared to 8.1% in the second quarter of fiscal 2024, suggesting that the economy is on a strong track Foundation is in place. In addition, retail inflation has declined over the past three months, falling from 5.7% in December 2023 to 5.1% in January 2024 and 5.09% in February 2024.

Since the last RBI-MPC meeting on February 24, the 10-year Treasury yield has fallen but the rise has not been significant as it is still trading in the range of 7.02-7.10%. Foreign investment inflows continue to be strong, led by strong FPI inflows.

Globally, the US Federal Reserve has hinted at three interest rate cuts in FY24; The first rate cut is expected in June 2024. However, there are rumors that the Fed will push these rate cuts further due to stubborn inflation. The Bank of England (BoE) and the European Central Bank (ECB) are also expected to cut interest rates this year.

Given the resilience of the Indian economy and reduced external pressure, the RBI is unlikely to pivot at this stage.

“This monetary policy of RBI will remain in 'risk mitigation mode' to keep inflation on target while supporting growth. Given that the RBI governor has highlighted the target of bringing inflation to 4% on a sustained basis, the policy rates are likely to be put on hold in the upcoming policy meeting with no change in stance,” says CareEdge in its report “RBI's Policy Preview: A Balanced Policy with Focus on Liquidity”.

Current liquidity situation in the banking system

Loan growth increased slightly to 16.5% (excluding merger) in Feb'24 from 16.2% in Jan'24. As of March 8, 2024, loan growth was 16.5%. “Deposit growth remained stable, increasing marginally to 13.1% on February 24 compared to 13.2% in January 2024). As of March 8, 2024, deposit growth was 13.7%. Even as deposit growth remains in double digits, loan growth has outpaced deposit growth,” said a Bank of Baroda report.

What should FD investors do if RBI maintains repo rate in April MPC?

If the RBI MPC takes a pause on hike in monetary policy in April – which will be the case for the seventh consecutive time – there will be a brief respite for FD investors. “Given the ongoing liquidity deficit in the banking system and expectations of interest rate changes, investors should consider maintaining the current high interest rates on fixed deposits,” said Nirav Karkera, head of research at Fisdom.

Vipul Bhowar, Director, Listed Investments, Waterfield Advisors, says, “With deposit growth lagging behind loan growth, banks are trying to bridge the gap by steadily increasing interest rates; therefore, the current pause in repo rates means depositors can continue to benefit from high deposit rates.”

Adhil Shetty, CEO, BankBazaar.com, suggests that considering interest rates will remain stable for a while, investors should stock up on FDs and invest for the long term.

There is a possibility that the interest rates on certain FD lines will rise and then fall over the next few months. “Laddering could be a suitable approach to diversify due dates,” adds Karkera.

Harish Reddy, co-founder of Stable Money, says this seems to be a good time for investors to commit to high interest rates on longer-term FDs.

RBI MPC: Rate cut likely in second half of fiscal 2024-25

Even if the RBI leaves the repo rate unchanged in the upcoming monetary policy, there could be a rate cut in the second half of fiscal 2024-25. “Going forward, we expect the RBI MPC to consider rate cuts in the second half of FY25 as headline inflation approaches the 4 per cent threshold. By then, the RBI will likely have gained further clarity on the risks associated with food inflation in the Federal Reserve's policy outlook,” says CareEdge.

The Bank of Baroda report said: “The probability of any rate cuts has been brought forward to the second half of FY2025. We expect two rate cuts of 25-50 basis points this year, with the first likely to occur in August 24, but this is subject to an evolving inflation scenario.”

“As far as timing of investing in fixed deposits is concerned,” says Raghvendra Nath, MD, Ladderup Wealth Management, “we believe that possible interest rate cuts would be gradual and would have only a marginal impact, probably in the range of 0.25% to 0.50% .”

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