The Reserve Bank of India (RBI) has once again for the seventh consecutive time kept the repo rate unchanged at 6.5 per cent, signalling stability in fixed deposit interest rates.
Since the last repo hike in February 2023, when the rates were increased from 6.25 per cent to 6.5 per cent, the rate of interest on fixed deposits (FDs) have remained at their highest levels in the past 4-5 years. The unchanged repo rate implies that banks are unlikely to decrease the rate of interest on FDs in the near future.
However, the pertinent question arises: How long will this high FD interest rates regime last?
Adhil Shetty, CEO of Bankbazaar.com says: “This move aims to keep inflation in check within the targeted range while sustaining market momentum. The central bank’s strategy reflects careful consideration of robust economic indicators, amid factors, such as monsoon performance, US Federal decisions, and overall economic growth, ensuring continued high growth prospects for the country.”
“The expectation now is for rates to potentially adjust towards the end of this year when inflation moderates and the food inflation remains within expected parameters. This cautious approach by the RBI indicates a deliberate assessment of the impacts of previous rate actions and economic data before contemplating further adjustments,” he adds.
Simply put, while rate cuts are not expected immediately, factors, such as persistent food inflation and global economic conditions, including decisions by US Federal Reserve and European Central Bank, could postpone future rate adjustments. Further strong economic macro grow also gives the RBI reason to postpone reducing rates.
Shetty says that FD rates, influenced by factors like the RBI’s policies, such as the repo rate, are likely to remain stable when the repo rate is unchanged.
“This stability benefits FD investors, especially those seeking predictable income streams, such as retirees and conservative investors prioritizing capital preservation and regular earnings,” he says.
Investors can seize this opportunity to invest in FDs at high rates of interest, as further hikes in future seem improbable. However, there can be small hikes in immediate future, but not substantial ones as we are already on the peak of a rate hike cycle.
If you wish for extra returns in the range of 9-9.5 per cent on your FDs, consider diversifying further from scheduled commercial banks (SCBs) to small finance banks, but only those that are covered under the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance limit of Rs 5 lakh. Also consider deposits only up to Rs 5 lakh with small finance banks. For larger deposits, consider using different types of accounts to qualify for the Rs 5 lakh cover separately on each account.
As FD rates start to decline, it’s the short- to medium-term interest rates that are usually affected first. While the impact on long-term FD rates will be less significant and slower, you may get a longer window to park funds in long-term FD at current higher rates. However, waiting further reduces this window.
Regarding loans, Shetty says that if one has loans with higher interest rates or want to benefit from potential rate reductions in the future, then it would be worthwhile to consider refinancing the loans. This involves transferring your existing loan to another lender offering lower interest rates or better terms.
“You may use this period of stable interest rates to build up your savings or emergency fund. Having a financial buffer can provide security during unexpected expenses or economic uncertainties. Consider making partial or full prepayments towards your loans. This can help reduce the total interest paid over the loan tenure and shorten the repayment period,” he says.
Raoul Kapoor, Co-CEO, Andromeda Sales and Distribution, says he expects a potential rate cut in upcoming monetary policy committee (MPC) meetings, as he feels that the RBI Governor hinted at this with a departure from usual policy mirroring Federal Reserve.
RBI Governor Shaktikanta Das highlighted how inflation is gradually decreasing and emphasised the robust growth in India’s economic landscape.
“We anticipate that in the upcoming MPC meetings, the RBI will likely announce a rate cut ranging from 25-50 basis points, provided the current conditions continue to improve. Interestingly, the impact of rate increases has had minimal effect on the demand for home loans, which continues to rise. At Andromeda, we have observed approximately a 25 per cent growth in the total disbursement of loans, including home loans, loans against property, and personal loans, during FY24,” Kapoor adds.
