RBI has kept its repo rate unchanged for now

Countdown for FD rates fall has started: Last window to invest in fixed deposit at current high rates However, with falling global interest rates, RBI may soon cut rates, especially by December. FD investors are advised to lock in current high rates before the expected rate cuts. Those opting for short to medium-term FDs should hurry, while long-term FD investors have a bit more time

The dream run for fixed deposit investors may not last long despite RBI holding its repo rate in its MPC meeting today. RBI went for the repo rate hikes two years ago when all global central banks were raising their interest rate to tame high inflation, and RBI was compelled to follow suit. However, the tide has turned now and interest rates have started falling globally and India is unlikely to remain immune from this.

This could be the last window for fixed deposit investors to lock in their deposits at the current high rates and make the most of this situation.

Lower EMIs for home loan borrowers soon: RBI likely to cut repo rate up to 50 bps by March 2025 despite no change now

RBI will have to follow the global trend sooner than later

The U S Federal Reserve cut the interest rate by 50 bps in September, which set the ball rolling for reversing the interest rate cycle. Many global central banks have started cutting rates, leading to many expecting a rate cut by the RBI. However, RBI was late in raising rates and increased the rates by lower quantum when other central banks were raising rate by bigger margins. The Indian central bank is likely to do the same during interest rate reduction by other central banks.

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A 25 bps rate cut expected to start in December

The US Federal Reserve is likely to go for another rate cut in November this year by another 50 bps. Many experts believe that the RBI may be unable to avoid a rate cut by the next MPC scheduled in December.

“Broad market expectations from economists over the last couple of months indicate a change in stance by the RBI led by cooling of inflation, taking cognizance of the recent weakness in global economy and volatility in financial markets, potentially leading to the first 25 basis point rate cut in December 2024,” says Suresh Darak, Founder & Director, Bondbazaar

Kapil Gupta, Executive Director - Research, Nuvama Institutional Equities, believes that the interest rate cut could start as early as December.

50 bps rate cut likely till March 2025 if inflation is under control

December rate cut may not be the only rate cut as far as financial year 2025 is concerned if inflation remains subdued. “Despite inflation remaining below 4% over the past two months, primarily due to a favourable base and some sequential slowdown in food prices, the risk to food inflation remains high,” says a report from CareEdge.

"If food inflation moderates, we could see a shallow rate cut of 50 bps in the upcoming policy meetings in this fiscal year," says the report from CareEdge.

Other factors may prevent a rate cut. “Beyond food price pressures, additional inflation risks arise from the external sector. The potential for a broadening conflict in the Middle East could disrupt supply chains and impact global energy prices, which would have ripple effects on the domestic economy,” says the CareEdge report.

The resurgence of China also poses a challenge to inflation. “The announcement of economic stimulus in China has led to an increase in global commodity prices, particularly industrial metals, over the past month,” says the CareEdge report.

FD investors should utilise this window before the rate fall starts

While the interest rate cycle is likely to reverse when interest rates start falling in a few months, the possibility of the rates going up in the short term can not be ruled out. 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.

"This gives an opportunity for investors to lock in current rates through fixed income investments, especially before the next policy in December 2024 when we could potentially see a 25 basis point rate cut owing to a cooling retail inflation and global economic slowdown,” says Darak.

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 want to book FDs for the short to medium term, 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 the Deposit Insurance and Credit Guarantee Corporation. For higher deposits, use multiple types of account in different capacities, making you eligible for the Rs 5 lakh cover separately on each account.

This story originally appeared on: India Times - Author:Faqs of Insurances