High Fixed Deposit Rates
: If fixed deposits are your go to investment avenue, then the RBI monetary policy meet has good news for you. RBI governor Shaktikanta Das announced that the MPC has decided to keep the
repo rate
unchanged at 6.5%. This means that the higher
interest rates
offered by banks on FDs are unlikely to come down anytime soon.
The last time RBI raised the repo rate was in February 2023, from 6.25% to 6.5%.
This overall increase of 2.5% since the start of the repo rate hike cycle in May 2022 pushed
fixed deposit
interest rates to their highest level in the past 4-5 years. With the repo rate remaining unchanged now, depositors can continue to benefit from these high FD interest rates for a while longer.
But how long will this period continue? Will the opportunity for depositors to lock in FDs with higher interest rates for longer terms come to an end soon in this rate cycle?
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When will RBI cut rates?
It seems highly unlikely that there will be any rate hikes in the near future. The cycle of rate hikes is nearly over, and it’s just a matter of time before interest rates begin to decrease. However, persistent inflation may postpone the decision to cut rates.
Shraddha Umarji, Economist-Institutional Research at Prabhudas Lilladher, was quoted by ET as saying, “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,”
Strong economic growth, despite stubborn inflation, will give the RBI reason to postpone reducing rates. Baijal explains that the economy has shown robust growth, as seen in the better-than-expected GDP growth during Q3 FY’24. This strong growth will likely provide sufficient support for the RBI to maintain unchanged policy rates for the coming months.
The likelihood of a rate cut seems to be at least 3-6 months away. According to a research report titled “Recap 2024 . Crystal Gaze 2025” by Pantomath Financial Services Group, the RBI could potentially contemplate rate cuts in the second half of FY2025, depending on overall inflation and the monetary policy positions of global central banks.
Umarji suggests that the RBI will monitor the actions of central banks like the Fed and ECB regarding rates. Therefore, it’s improbable that rate cuts will occur before October. However, there’s a possibility that the RBI could shift its stance to ‘neutral’ by June or August.
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What should FD investors do now?
While there’s a possibility that some banks might increase their FD rates, a substantial hike seems improbable. A decrease in rates is inevitable; the uncertainty lies in whether it will occur within the next 3 months or later. Hence, the current FD interest rates are nearing the recent peak of the ongoing rate hike cycle.
Adhil Shetty, CEO of Bankbazaar.com explains that FD interest rates, affected by factors like the RBI’s policies such as the repo rate, tend to stay steady when the repo rate doesn’t change. This stability helps FD investors, especially retirees and conservative investors who value steady income and capital preservation.
This might be your final opportunity for a while to invest your FD deposits at the current high interest rates. If you’re comfortable with risk, consider depositing with small finance banks, as many offer attractive rates, such as 9% for general citizens and 9.5% for senior citizens. However, be cautious not to invest excessively in FDs with small finance banks. It’s advisable to limit your exposure within the insurance limit of Rs 5 lakh.
For larger deposits, consider using different types of accounts to qualify for the Rs 5 lakh cover separately on each account.
When FD rates begin to decline, it will affect short- to medium-term interest rates first. If you have surplus funds for the next 2-3 years, consider booking FDs now or within the next 2-3 months.
The impact on long-term FD rates will be slower and less significant. Therefore, you may have a longer window to secure a long-term FD at current higher rates. However, waiting too long increases the risk of rates falling.