Final call to book FDs at high rates? All eyes on MPC

A better-than-expected economic performance despite pressures in some segments of the economy has given the Reserve Bank of India (RBI) one less reason to worry as it meets this week to review its monetary policy. Shaktikanta Das, Governor of the Reserve Bank of India, will announce the decisions of the central bank’s Monetary Policy Committee (MPC) on February 8, 2024. The central bank is likely to hold the repo rate again in the upcoming monetary policy review, experts say. But this stance may not continue for too long. How does the decision of the RBI MPC impact the investors, especially fixed deposit (FD) customers? How should they manage their investments in the long term? ET Wealth Online explains:

RBI MPC in February 2024: RBI likely to keep the repo rate unchanged at 6.5%

The repo rate is one of the major factors that drive interest rates of deposits. When the repo rate increases, typically the interest rates on fixed deposits go up and the interest rates on loans go down. When the central bank reduces the repo rate, the deposit rates usually go down.

After hiking its repo rate by a cumulative 250 basis points, the RBI has kept it untouched since February 2023 as retail inflation largely remained within the bank’s 2%-6% target range. The central bank has kept the repo rate unchanged at 6.5% for the last five monetary policy reviews.

What should investors expect from the RBI’s February monetary policy review? Answering this, Madan Sabnavis, Chief Economist, Bank of Baroda, says, “The MPC is likely to maintain an unchanged approach in terms of both rate and stance.”

A SBI Research report also says the same: “We expect the RBI to continue to pause stance in upcoming policy.”

Inflation is still a pain point for the RBI

Inflation remains one of the major pain points for the central bank. Rising food prices and an unfavorable base drove headline inflation to a four-month high of 5.7% in December. The headline inflation maintained its upward trajectory over the past two months.

CareEdge says in its RBI’s policy preview: “The elevated levels of food inflation continue to be a source of apprehension, as prices within the food and beverage. recorded a growth of 8.7% YoY in December, up from 8% in the preceding month. While prices of perishables, led by vegetable prices, continue to be in double digits, an enduring inflationary trend in non-perishable food categories, such as cereals, pulses, and spices, raises serious concerns about the potential broadening of price pressures due to their inherent stickiness.”

Will RBI change its stance to ‘neutral’ in the upcoming MPC?

If the RBI changes its stance from “withdrawal of accommodation” to “neutral”, it would officially signal the reversal of the interest rate cycle.

While headline inflation is elevated, primarily due to rising food prices, core inflation remains relatively subdued. Persistent concern is from higher food inflation.

“There is an expectation that headline inflation will moderate in the coming months, aided by a favorable base effect lasting until July 2024,” says CareEdge. “The arrival of rabi harvests in the market from mid-March will also alleviate pressure on food prices. Liquidity conditions have tightened, and money market rates are currently elevated. Given the prevailing circumstances, the RBI will continue to support economic growth while maintaining a cautious stance on inflation. Consequently, we expect the MPC to keep the current policy rates unchanged. However, there is a possibility of a shift in stance to ‘neutral’ in the February policy.,”

RBI likely to hold repo rate: What FD investors must know

If the RBI holds the repo rate in the upcoming February MPC meeting, how will it impact fixed deposit (FD) investors? Fisdom Research Views says, “We anticipate that short-term fixed deposit rates will increase shortly, but longer-term FDs are nearing their peak and have minimal room for further hikes.”

Way forward for RBI: A rate cut likely in June MPC?

The next question is how long the central bank will hold the policy rates unchanged. The government showing better-than-expected fiscal control in the Budget 2024 and other macroeconomic indicators could help in a premature policy pivot. Other measures, like the 11.1% bump in capex outlay and reluctance to opt for populist schemes, are likely to create headroom for the rate-setting panel to ease policy rates earlier than expected.

Moreover, with the moderation in global inflationary pressures from last year’s highs, major central banks are expected to start their rate-cutting cycle around the middle of 2024. After a dovish policy in January, the US Federal Reserve (Fed)’s dot plot shows the possibility of a 75-basis-point rate cut in 2024, higher than the 50-basis- points rate cut indicated by the dot plot in the September update.

“Looking ahead, we expect MPC to consider cutting rates in Q2FY25 when headline inflation inches closer to the 4% mark,” says CareEdge.

Raghvendra Nath, MD, Ladderup Wealth Management, does not see a rate cut happening immediately. “However, a case is now building up where lower rates can propel economic growth. The RBI should draw further comfort whenever the US Fed starts reducing rates, as it will reduce any unexpected depreciation risk of the INR. If the monsoon season is normal, and considering all the above factors, there is a good chance the rate cycle should turn around towards the second half of next financial year.,” adds Nath.

Abhishek Kumar, a Sebi-registered investment adviser, says a rate may well be around the corner. “The central government by sticking and even lowering the current fiscal year deficit target by 10 basis points. This has made it easier for the MPC to decide to lower the repo rate. This would help in avoiding crowding out the private sector for funds as the Centre is bringing its spending under control. This could lead to better inflation control and hence the MPC might act in advance and advise the RBI to lower the repo rate sooner than expected.”

FD investors: Final call to book your FD before it drops

If the RBI lowers the repo rate, banks would soon lower interest rates correspondingly. So risk-averse investors can lock in money for the long term into bank term deposits, says Kumar.

“As the RBI moves towards rate cuts, it will affect FD rates across all tenures, albeit to varying degrees. The extent of the decrease will likely differ depending on the duration of the FD,” says Fisdom Research.

Whenever the interest rate starts falling, the short- and medium-term rates will be impacted more. It may take some time for the long-term interest rates to get impacted. So if you are planning to invest in FDs of short or medium term, this may be the last window in the current interest rate cycle to do so at the prevailing higher rates.

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