RBI MPC on October 9, 204: Will RBI cut the repo rate?
“Three developments stand out: softer growth numbers have trickled in recently, inflation has been falling, and the external environment has moved from rate hikes to cuts,” says a research report by HSBC.
According to the report, recent data indicate a softness in growth, particularly in urban sectors, with GDP, manufacturing, motor sales and other key indicators showing weaker performance. This trend reflects a normalisation from previous highs rather than a significant slowdown, with a shift from overheating urban areas to lagging rural sectors.
While inflation would have risen slightly in September due to the base effect, the underlying core inflation remains weak. “Normalising temperatures are likely to lead to lower food inflation. Core inflation will likely remain soft as long as global excess capacity keeps prices low. We forecast inflation to fall gradually to the 4% ballpark by March 2025,” says the HSBC research report.
Some positive signs, such as high government cash balances and increased private sector investment intentions, suggest potential growth. “With monetary policy loosening in several advanced economies, the RBI, too, seems to have revealed a preference for looser liquidity,” the report adds.Considering all these factors, the central bank is likely to keep the repo rate unchanged at 6.5% in the upcoming Monetary Policy Committee meeting.
Rahul Bajoria, India & ASEAN Economist, BofA Securities, says, “The RBI is set to remain on hold for the tenth consecutive MPC, keeping the repo rate at 6.50%. The guidance from the RBI for near-term growth and inflation dynamics remains upbeat, and that rules out any material risk of a change in monetary policy guidance in the upcoming October MPC meeting.”
RBI MPC on October 9, 2024: A shift in stance is likely
While a rate cut looks less likely, the chances of a change in the RBI’s stance is more likely. Bajoria adds, “Still, incoming near-term data is much more mixed, and growth risks appear tilted to the downside, in our view. It is possible that the RBI may also signal greater data dependence going ahead, as real rates remain elevated, and headline inflation is closest to the inflation target it has been in almost twenty-two quarters (on a four-quarter rolling basis). This opens up the possibility of a shift in stance to neutral as well if the RBI wants to entertain the idea of a rate cut.”
Many experts say that a rate cut is likely to start from the next RBI MPC, in December this year. According to the HSBC report, “We believe the RBI doesn’t gain from waiting any longer. We think it will change its stance from a hawkish ‘withdrawal of accommodation’ to ‘neutral’ in the upcoming October 9 policy meeting, followed by repo rate cuts of 25 bps each in the December and February meetings.”
What strategy should FD investors follow now?
So be it in December 2024 or February 2024, a rate cut is on the way. What should fixed deposit investors do now? Nirav R Karkera, Head-Research, Fisdom, says, “This is an opportune moment for fixed income investors to lock in rates at elevated levels. Considering how the case for future rates is balanced between status quo and declines, fixed-rate propositions may be favoured over floaters.”
Investors who have already laddered fixed deposits across time frames to optimise for liquidity may be exposed to reinvestment risks, he says. “It may now make sense to move away from a ladder and move to a strategy closer to a barbell where longer-term savings lock yields at higher rates, and shorter tenure FDs are maintained to service liquidity and not reinvestment as much.”
When will banks start lowering interest rates of FDs?
Considering how the case is stacking up for the rate reversal to kick start sometime around the end of this calendar, the new year could pretty much begin with lower policy rates, which would percolate into deposit rates as well, Karkera says. “However, one must consider how despite policy rates being a factor in determining FD rates, the robust credit demand and servicing environment could lead to competitive deposit pricing by several banks, leading to relatively elevated rates being offered for an extended period. The case for elevated rates on fixed deposits linger in favour of FD savers,” Karkera adds.