RBI MPC decisions’ announcement on June 7: RBI likely to keep the repo rate unchanged at 6.5%
Thanks to a better-than-expected economic performance despite pressures in some segments of the economy, the central bank is expected to keep the repo rate unchanged at 6.6% for the seventh time in a row.
Radhika Rao, Executive Director and Senior Economist, at DBS Bank, says, “We expect the RBI monetary policy committee (MPC) to extend the pause on rate hike in June, with an unchanged policy stance.” Pointing out the reasons behind the status quo, Rao says, “An 8% GDP growth print, above-target inflation, and uncertainty over the US Fed’s (Federal Reserve’s) direction are expected to keep the RBI MPC comfortable in its stance at this juncture.”
Aditi Nayar, Chief Economist, Head of Research and Outreach at ICRA, says, “Recent inflation data and the outlook for prices of food and commodities had suggested a status quo on the rates and stance in the upcoming June 2024 monetary policy review. This has been further cemented by the higher-than-forecast expansion in the Indian economy in Q4 FY2024, which led to the full-year GDP growth printing above 8%.”
While core inflation in the economy has been moderating, high food inflation remains a concern. The central bank would like to wait and watch how the monsoon pans out in terms of spatial and temporal distribution as that would have a bearing on food inflation in the coming months.
In its RBI Policy Preview report, CareEdge says, “With the fresh mandate in the 2024 general election, the direction of the broad policy and budgetary allocation will be crucial to observe, as the new government is expected to present its budget next month. Given that the RBI Governor has been highlighting the aim of getting inflation to 4% on a durable basis, the policy rates are likely to be kept on hold in the upcoming policy meeting, with no change in stance. The RBI would also be watchful of the newly formed government’s upcoming budget to get an indication of the likely fiscal path. More clarity on the US Federal Reserve’s policy decision will also aid the RBI. With uncertainties lingering on the domestic and global front, we expect RBI to remain in wait-and-watch mode. Hence in the upcoming meeting, we expect MPC to keep the policy rate on hold with no change in stance.”
Will high FD rates continue? How repo rate impacts FD interest rates
Repo rate is one of the major factors that drive interest rates on deposits. “If the RBI maintains the current rates, deposit rates will remain stable, not having any significant impact on FD investors,” says Raghvendra Nath, MD, Ladderup Wealth Management. So, FD investors can enjoy the higher interest rates for a few more months.
FD investors: What strategy should you follow for your short-term and long-term FDs?
What should be the ideal strategy for your FD investment now? Mahendra Kumar Jajoo, CIO-Fixed Income, Mirae Asset Investment Managers, says, “There seems to be broad consensus among market participants that interest rates have peaked in the current cycle. As such, generally speaking, it seems an appropriate time for investors to lock in to the prevailing higher market yields.”
Nirav Karkera, Head of Research, Fisdom, says one effective strategy is to lock in to long-term fixed deposits now, securing high rates for an extended period such as five years or more. “This allows investors to benefit from these rates even if they decline later.”
Another approach is laddering fixed deposits, where the investment is divided into multiple FDs with different maturities — for example, one year, two years and three years. This ensures the periodic maturity of some investments, providing liquidity and the opportunity to reinvest at prevailing rates, thus reducing reinvestment risk and maintaining a balanced approach to liquidity and returns. “Additionally, investing in short-term fixed deposits (one year or less) offers the flexibility to reassess the market situation and reinvest at potentially higher rates of different instruments as the interest rate trend becomes clearer,” Karkera adds. However, investors should focus on the quality of banks rather than just chasing high FD rates, says Nath.
When will RBI start reducing repo rates? A way forward
How long can investors continue getting these high FD interest rates? Karkera says, “Banks are unlikely to lower FD interest rates until liquidity conditions improve. Given the current stance of the Federal Reserve and the RBI, rate cuts are expected to begin in the second half of this financial year. Currently, the credit-to-deposit ratio remains high, making deposit mobilisation crucial. Therefore, banks will wait for RBI’s guidance on liquidity and the MPC stance before considering rate cuts. Once the RBI starts reducing rates, banks are likely to follow suit.”
CareEdge adds, “Going ahead, we anticipate that the MPC will contemplate rate cuts in the second half of FY25. By then, the RBI will likely have gained further clarity on the risks associated with food inflation and the policy outlook of the US Federal Reserve.”