The reasons for this are: the Reserve Bank of India (RBI) likely to keep key rates unchanged yet again in its June Monetary Policy Committee (MPC) meeting and the recent withdrawal of Rs 2,000 currency notes from circulation. Let’s understand why the possibility of a repo rate pause is high and what depositors may do nowWhy RBI may put a pause on an interest rate hike in June 2023
The RBI MPC is likely to keep the repo rate unchanged at its three-day meeting, starting from June 6, 2023. Inflation is the primary focus area of RBI, and it has fallen within RBI’s comfort zone. Moreover, the economy has also been growing despite global headwinds. “The evolving growth-inflation mix indicates a continued pause from the RBI in June. The upside surprise seen in the latest released GDP numbers for Q4FY23 shows that the economy is resilient even as private consumption expenditure remains on the slow track. Headline CPI inflation (YoY) has come down and we anticipate the softening bias to continue,” said Indranil Pan, Chief Economist, YES Bank.
Adding to this, Rumki Majumdar, Economist, Deloitte India, said, “Globally, there are signs that the central banks may also take a pause or go with fewer hikes as runaway inflation takes a breather. This will further help the RBI to maintain the status quo.”
Not only a pause is the most likely outcome of the RBI MPC, but the future intent is also likely to discourage any infusion of liquidity in the system. “Further, there is reason to believe that the stance will remain unchanged too, and withdrawal of accommodation will be persisted once again,” said Madan Sabnavis, Chief Economist, Bank of Baroda. Banks are likely to get major liquidity boost due to deposit of Rs 2,000 bank notes after the central bank’s announcement of its withdrawal from circulation. “The announcement of the withdrawal of the Rs 2000 note has led to an increase in deposits in the system which is getting reflected in the higher surplus liquidity levels in the system. Hence there is scope to persist with this stance (withdrawal of accommodation),” said Sabnavis. Will the FD interest rates start decreasing soon?
Several experts think RBI may cut interest rates soon in the near future. Commenting on a timeline, Pan said, “While we expect the RBI to stay on a pause in June, the next move is surely a cut. However, we might have to wait till around the February 2024 MPC meeting for this cut.” Though other factors influence the interest rates of fixed deposits offered by the banks, the repo rate plays a major role. So, it is possible that if RBI starts to cut the repo rate, banks may also start cutting interest rates on fixed deposits.
Limited window for depositors to hop on the high FD-rate bus
As an FD investor if you want to make the best out of the likely interest rate cycle reversal towards possible rate cuts, you need to act now. “Fixed deposit investors should position themselves accordingly by taking a call to book their deposit before banks start cutting deposit rates due to RBI action,” said Abhishek Kumar, a SEBI Registered Investment Advisor and Founder of www.sahajmoney.com.
Don’t worry. Investors still have a chance to hop on the bus of high fixed deposit interest rates. If investors are still sitting on the sidelines waiting for higher interest rates on FDs, this is an indication to get going with their deposits, said Dev Ashish, a SEBI Registered Investment Advisor and Founder of StableInvestor.com.
“The broad advice right now is to lock into these rates since they’re not likely to climb too much here on,” said Adhil Shetty, CEO, BankBazaar.com.
For investors, well-known public and private sector banks such as SBI, HDFC Bank, Kotak Mahindra Bank, Punjab National Bank, and ICICI Bank offer interest rates in the range of 7 to 7.25 per cent. Senior citizens get a chance to earn an additional 0.50 per cent on FDs. The interest rate on fixed deposits can go up to 7.75 per cent for senior citizen customers. A handful of banks also offer special deposits of 444 days or 55 months which offer higher rates compared to traditional tenures of two years or three years.
“It makes sense to lock into those tenors even for an FD, which is typically treated as a short-term instrument. In a high-rate scenario such as this, the FD can also be a long-term income generator,” said Shetty.
Investors can also opt for long-term fixed deposits such as five years and ten years if they align with their investment horizon. “As bond markets and some macro-economic indicators are showing signs of the peaking of interest rates, depositors should prefer FDs offering higher yields, especially if those offered for longer tenures,” said Naveen Kukreja – CEO and Co-founder, Paisabazaar.
“Even though the banks may increase the fixed deposit rates a bit more to gather more deposits, chances are that we are quite close to peak FD rates. So it might be a good time to begin locking in the money (you have earmarked for FDs), at least a part of it, in sufficiently long FD tenures,” said Dev Ashish.