Interest rates on FDs have gone up significantly in the past year, all thanks to the repo rate hike by 250 basis points (bps) in just 10 months — from May 2022 to February 2023. However, the era of rising interest rates is almost over. This is because after back-to-back pauses in the repo rate hike since February and the withdrawal of Rs 2,000 notes from circulation in June, banks have put a temporary hold on increasing FD interest rates. Further, some of the prominent banks have already started reducing interest rates on FDs on specific tenures. In this scenario, what should FD investors now?
RBI likely to keep repo rate unchanged at 6.5% on October 6, 2023
Most experts say that the central bank is likely to keep the repo rate unchanged at 6.5%. “The RBI monetary policy committee (MPC) is expected to extend its hawkish pause and keep the ‘withdrawal of accommodation’ stance, at the upcoming policy review on October 6, 2023,” says Radhika Rao, Senior Economist, DBS Bank.
“The food-related spike in July inflation moderated into August, as a combination of administrative measures, stepped-up supplies and a shorter crop cycle for vegetables helped to calm the sequential trend. Cereals and pulses are still proving to be sticky, which warrants attention. The trend is favourable for September as perishables continue to correct, alongside ebbing non-food costs on a cut in the cooking gas price besides lower core inflation. The rigidity in international oil prices will percolate into the WPI inflation, with consumer prices unlikely to be adjusted. With inflation evolving along expectations, but staying above target, the RBI MPC is on course to maintain a hawkish pause in October,” Rao says.
Further, the central bank is likely to keep the repo rate unchanged at the current level till the end of this year. Explaining the rationale behind this, Madan Sabnavis, Chief Economist, Bank of Baroda, says, “The credit policy this time will most likely continue with the existing rate structure as well as policy stance. Hence, the repo rate will be retained at 6.5% with the stance of withdrawal of accommodation. Inflation is still high at 6.8% and while we do expect it to come down sharply in September and October, there is still some pessimism on Kharif output especially relating to pulses which has potential to push up prices further. But as the inflation trajectory is downwards a rate hike can be ruled out. However, we may have to wait for a longer time for the MPC to cut the repo rate.”
No further FD rate hike in the near future
If the repo rate remains unchanged, will the FD interest rates remain stagnant? Will there be no deposit rate hike in the coming days? Let’s make one thing clear first. Considering most macro-economic indicators, experts believe, any significant hike in FD rates is highly unlikely in the near future. “The FD rates are at their peak and are not expected to rise any time soon,” says Adhil Shetty, CEO, of BankBazaar.com. Echoing the same, Akshar Shah, founder of Fixed Invest, says, “FD rates are currently at multi-year highs. We don’t see much room for FD rates to move higher in the near term.”
Will banks reduce FD interest rates sharply now?
Now, several prominent banks have already started reducing interest rates of fixed deposits for certain tenures. For instance, HDFC Bank has recently lowered interest rates of two special FD schemes, effective from October 1, 2023. Axis Bank, Punjab National Bank (PNB), Union Bank of India, DCB Bank, and IndusInd Bank are among the banks that have cut interest rates on their fixed deposits recently. Explaining the reasons behind the reducing FD interest rates, Saurabh Jain, Co-Founder, Stable Money, “Many banks have reduced their interest rates of fixed deposits on specific maturity periods which might appear counterintuitive in light of RBI’s unchanged repo rate. This is mainly on account of a substantial rise in the deposit base of the banks post-Covid-19. This has escalated the cost of funds for banks, impacting their net interest margins (NIMs). NIM is the difference between what a bank earns on loan interest and what it pays on deposits. In addition, withdrawal of Rs 2,000 denomination currency notes from circulation has injected additional liquidity into the banking system, reducing the immediate demand for traditional deposits.”
When can you expect banks to start reducing FD interest rates?
Giving a hint at what awaits FD investors in the future, Anshul Gupta, Co-Founder and Chief Investment Officer, of Wint Wealth, says, “From retail investors’ standpoint, we are at the peak of the interest rate hike cycle and banks will likely reduce interest rates starting from the second quarter next year.”
FD interest rates are unlikely to drop sharply
“Fixed deposit rates of banks have been stable for some time now, with some specific tenure deposit rates being reduced marginally this month. Banks could continue bringing down FD rates as credit offtake remains high despite the 250-bps hike in the repo rate since mid-2022. FD investors should be prepared for rollovers to happen at lower than current rates if they are invested into deposits that are more than one year in tenure,” says Mayank Bhatnagar, Chief Operating Officer, FinEdge.
Though FD interest rates have started dropping, many experts do not expect a significant drop in deposit rates in the near term. Shetty explains, “The liquidity continues to be tight and except for marginal readjustments, the FD rates are expected to hold for the near future.” Raghvendra Nath, MD of Ladderup Wealth Management, “Unless the RBI changes its stance on liquidity and inflation, and undertakes a sustained reduction, banks will not reduce FD rates.”
Start booking your long-term FDs
For FD investors, Anshul Gupta suggests, “Over the next three to six months, retail investors should lock their funds in long-term fixed deposits at higher interest rates. Depending on the goal and timeframe of their investment, they can stagger this investment into a few smaller FDs across different commercial and small finance banks, as well as NBFCs.”
If you want to book a long-term FD at a high interest rate, you may start booking them now. “While many banks have reduced their FD rates, some small finance banks are still offering FD yields of 8% per annum and above for two-to-three-year tenures. Thus, depositors seeking higher returns from fixed-income instruments should book these high-yield FDs after factoring in their investment horizons. Locking these high-yield FDs now should allow depositors to earn higher FD interest income after the reversal of the interest rate regime,” says Naveen Kukreja, Co-Founder and CEO, of Paisabazaar.
“We expect the deposit rates to be reasonably lower towards the end of the first quarter of next financial year. This is a great time for investors to lock in higher interest rates and we advise them to book long-term FDs,” Jain says.