RBI MPC Meet: How your Fixed Deposit rates may get affected in near future

FD rates: On Friday, in its latest Monetary Policy update, the Reserve Bank of India (RBI) chose to maintain the repo rate at its current level and kept a neutral stance. Consequently, the interest rate for short-term fixed deposits may decrease in the coming year. The RBI's actions influence fluctuations in interest rates for both loans and deposits. Essentially, the repo rate serves as a signal to banks regarding the interest rates they should offer. 

A higher repo rate prompts banks to raise their interest rates on fixed deposits to attract more depositors, while a rate cut requires banks to lower their rates on FDs.

"The rate cut would have been to support growth, but they have kept their eye on the ball of inflation.  The next expectation of a 50 basis point rate cut, will be in February 2025," said Rajiv Anand, deputy managing director of Axis Bank Ltd. 

"In its MPC meeting concluded today, RBI kept its policy rates on hold, in line with its steadfast focus on durably aligning CPI with the 4% target. Pertinent to note that it wasn’t unduly perturbed by sharp moderation in Q2 GDP growth, which it saw as transitory. It instead chose to wait for more confirmation of CPI cooling off, especially given two elevated prints since the last MPC meet. RBI, however, cut CRR by 50 bps to alleviate liquidity tightness caused by aggressive FX intervention in the recent weeks. Going forward, CPI is expected to moderate over the coming months and is projected to reach around 4% by Q2FY26, while GDP projections have been revised downwards by RBI. Given this backdrop, we continue to expect a shallow rate cut cycle ahead beginning in February," said Piyush Baranwal, Sr. Fund Manager (Fixed Income), WhiteOak Capital Asset Management Ltd.

Effect on Fixed deposits

The repo rate was last raised by the RBI in June 2023, after which it has remained steady at 6.5%. A series of incremental hikes totaling 2.5% up to February 2023 prompted banks to significantly raise FD rates. However, with 21 months having elapsed since the last repo rate increase, it appears that interest rates are nearing their peak. Despite the central bank maintaining the status quo on the repo rate this time, it is expected that interest rates will likely decrease in the near future.

Although the current rate remains the same, it is anticipated that a decrease will occur in the upcoming meeting, resulting in a reduction of interest rate offerings. Anand noted that the variance between the repo rate and the one-year interest rate offerings for fixed deposits remains significant. 

Several banks have adjusted their FD interest rates in anticipation of the upcoming MPC meeting. Anand predicts that further changes may occur as interest rates could be reduced in February 2025. While the expected rate cut is minimal, it may lead to decreased rates for short-term deposits. 

Anand explained that a reduction in the Cash Reserve Ratio would lower deposit interest rates, resulting in a potential decrease in short-term interest rates in the next cycle. Despite the possibility of lower short-term interest rates, long-term rates are not expected to be significantly impacted. This information is based on insights regarding the RBI Monetary Policy.

“The RBI’s decision to maintain the repo rate at 6.5% keeps borrowing costs stable. However, the 50 basis points CRR cut to 4% is a game-changer, injecting Rs 1.16 lakh crore of liquidity into the banking system. This move is a boon for debt mutual funds, especially short-duration and liquid funds, as it stabilises yields and bolsters credit conditions. For the equity markets, increased liquidity is a positive signal for banking stocks. With enhanced lending capacity due to the reduced CRR, banks are positioned to improve profitability, potentially driving bullish sentiment across the financial sector, including NBFCs. Smart investors should capitalize on this scenario by focusing on quality debt funds and closely monitoring the performance of the banking sector for emerging opportunities," said Kirang Gandhi, Personal Financial Mentor.

"We believe that bond yields will continue to be supported by more liquidity infusion measures like OMO purchases by RBI and continuous growth slowdown along with Inflation cooling off, and investors can use any uptick in yields to increase their Fixed income allocation. Investors with medium to long-term investment horizon can look at funds having duration of 6-7yrs with predominant sovereign holdings as they offer a better risk-reward currently. Investors having an investment horizon of 6-12 months can consider Money Market Funds as yields are attractive in the 1yr segment of the curve. We expect the benchmark 10yr Bond yield to gradually drift lower towards 6.50% by Q4 FY2025," said Puneet Pal, Head- Fixed Income, PGIM India Mutual Fund. 

"Fixed income investing prefers a stable, almost ‘boring’ environment and that is exactly what has been delivered. Investors to continue using fixed income for effective portfolio construction. A barbell strategy with buying short end corporate bonds with long end G-Sec and bank infra bonds is suggested for benefiting from carry as well as potential capital gains," said Vishal Goenka, Co-Founder of IndiaBonds.com.