High FD interest rates may not last long despite RBI status quo; is this the last window to book fixed deposits at higher rates? This marks the eighth consecutive MPC with status quo, benefiting fixed deposit investors with high rates. However, going forward the interest rate cycle to reverse. The potential for a rate cut later in the year is anticipated
The Reserve Bank of India (RBI) in its Monetary Policy Committee (MPC) meeting held on June 7 decided to keep the repo rate unchanged at 6.5%. This is the eighth consecutive MPC in which the central bank has decided to maintain the status quo..live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget .sr_desc{margin:0 auto 0;} #sr_widget .sr_desc{color: #024d99;margin-top:10px;} #sr_widget .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget .sr_desc .text p, #stock_pro .sr_desc .text p{font-size:12px;font-weight:400;} Poll Trackers
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Fixed deposit investors are not complaining as they will enjoy a high interest rate regime for a longer period. Most experts agree that the interest rate hike cycle has virtually ended and the interest rate will start falling sooner or later. However, the start of the interest rate fall cycle has been delayed.
We tell you how long you can enjoy the current high rates, how significant the rate cut could be this year and what you should do with your fixed deposit investment.
Retail inflation low but RBI is likely to wait longer
Inflation remains one of the most critical factors that determines the policy action of RBI. When retail inflation was stubbornly high at 7.79% in April 2002, the central bank went on a rate hiking spree from May 2022 to February 2023 and raised the repo rate by 2.5%. Since then, policy rates have remained unchanged — for 15 months now — as RBI has been waiting for retail inflation to remain consistently near its comfort level of 4% (- + 2%). The retail inflation data for April 2024 has reaffirmed the cooling trend with retail inflation at a 11-month low of 4.83%.
Robust economic growth makes it easier for RBI to go for rate cut in near future
The central bank will continue to closely monitor inflation due to the GDP numbers, say experts.
"Recent economic indicators reveal a deceleration in GDP growth to 7.8% year-on-year in the fourth quarter of the last fiscal year, down from 8.6% in the preceding quarter, yet an improvement from the 6.1% growth observed in the corresponding quarter of the previous year. This nuanced economic landscape suggests the RBI will likely prioritise bolstering economic recovery while vigilantly monitoring inflationary trends," says Swati Saxena, Founder & CEO of 4 Thoughts Finance.
Amit Goel, Co-Founder & Chief Global Strategist, Pace 360, says, “Policy is turning more restrictive as cooling inflation pushes up real rates, hurting growth. The RBI’s surprise record dividend payment to the government may alleviate concerns about the growth outlook. Policymakers are likely to put the money to work in new spending in the budget revision due by July.”
Fall in 10-year government bond yield indicates repo rate cut may not be very far
The direction of yield of the 10-year government bond is a very good indicator of the long-term interest rate in the economy. Going by a recent trend, there is a visible drop in the yield. In 2023, the 10-year G-sec yield reached a high of 7.386% in October 2023 and fell to a low of 7.016% on June 6. It has gone below 7% level many times in the latter part of May and beginning of June. If this trend continues, it would make compelling ground for repo rate cut in coming days.
When is the repo rate cut likely to begin?
Most experts do not predict any rate cut in the next MPC, to be held in August. “While an immediate rate cut may not be on the radar, the potential reduction in the rates are likely to happen later in the year – maybe sometime around October. Forecasts regarding inflation might be revised down slightly, while growth predictions regarding GDP are expected to remain stable,” says Atul Monga, CEO & Co-founder of BASIC Home Loan.
Be it October or December, a cut in interest rate is likely to happen this year. However, it may be followed by a few more rate cuts in the following months.
What should you do with your fixed deposit investment?
Most experts say interest rates have peaked, and it is only a matter of time before they start falling. When interest rate starts falling, it usually affects FDs with short- to mid-term tenures first. Long-term FDs typically witness a fall in rates later.
So, if you have a surplus to invest in FD, this may be the best time to book your deposits as the prevailing high rates may disappear soon . If you are looking to book FDs for short to medium term, then the window may be shorter. In case of long-term FDs, you get a few more months to enjoy the current high 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 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, provided by theDeposit Insurance and Credit Guarantee Corporation. For higher deposits, use multiple types of account in different capacities, which will make you eligible for the Rs 5 lakh cover separately on each account.
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This story originally appeared on: India Times - Author:Faqs of Insurances
