Is it the last window to book FDs at high interest rates?

The Reserve Bank of India (RBI) has decided to keep the repo rate unchanged for the fifth consecutive time, at its bimonthly monetary policy committee meeting held on December 8. The previous repo rate hike happened in February when it was raised from 6.25% to 6.5%.

While banks had raised their fixed deposit (FD) rates, the increases have not been close to the repo rate’s 2.5% rise. The RBI had raised its concerns about a shortfall in transmission in the interest rates. Banks have been facing tighter liquidity conditions and higher credit growth, which have also been pushing the rates up in the short term.

The current pause in repo rate means that depositors can enjoy the high interest rate on fixed deposits for some more time. However, will there be a further hike in deposit rates, or is it the last window for depositors to book FDs for a longer tenure? Read on to know more.


Lack of funds with banks may push rates up in near term

The amount of funds banks need to borrow from the interbank market or from the central bank stood at Rs 1.74 lakh crore ($20.90 billion) on November 21, according to RBI data. When the short-term borrowing needs of banks are higher, it pushes

up

the short-term interest rates and banks are compelled to raise their deposit rates as well. In a sign of the liquidity crunch, overnight money market rates have been moving around the RBI’s marginal standing facility rate of 6.75%. For instance, on December 4, the weighted average rate for call money stood at 6.75%, while for market repo it stood at 6.77%.

Banks considered non-callable FDs as a more reliable source of deposits and, hence, offered a higher interest rate on these FDs. The minimum amount to invest in these FDs was Rs 15 lakh. As banks were able to get funds through these deposits, they were not offering a similar high interest rate on their retail FDs. The RBI changed the rule and raised the minimum amount of investment in these FDs to Rs 1 crore. This is likely to snatch a big funding source from banks and they may be compelled to raise their retail FD rates as well. This is the reason why banks have been raising interest rates on bulk deposits as well.


Many banks have raised their short-term interest rates

While many banks have stopped raising their peak interest rate, some are still raising their interest rates on short-term FDs, mostly those with tenure below 2 years.

Punjab National Bank raised its interest on FDs from 5.5% to 6% on tenure of 180 days to 270 days, from 5.8% to 6.25% on tenure of 271 days to less than a year. Indian Overseas Bank increased its FD interest rate from 6.50% to 6.80% for a tenure of 1 year to less than 2 years. The bank reduced the rate from 7.25% to 7.10% for FDs with tenure of 444 days.

On December 4, 2023, Bank of India increased rates on FDs above Rs 2 crore for shorter periods — tenure of 46 days to 90 days to 5.25%; 91 days to 179 days to 6.00%; 180 days to 210 days to 6.25%; 211 days to less than 1 year to 6.50%; and tenure of 1 year to 7.25%.

Macro factors indicate a rate fall likely in long run

While there may be greater uncertainty about when the rates will start falling, macro indicators show the grounds for a rate cut are getting stronger. Global inflation, which was primarily led by crude oil prices, has significantly subsided. From the highs of $115 per barrel seen in May 2022 after the Russia-Ukraine war, WTI crude oil prices have fallen significantly. It did rise briefly, touched $91 per barrel in September 2023, but has since cooled down significantly to below $73 per barrel.

The biggest global indicator of interest rate movement is the 10-year US bond yield, which crossed 4.9% in October but fell to 4.22% after that. When it comes to the 10-year Indian government bond yield, the macro trend has been in a decline as it fell significantly from its peak of 7.45% in March. It again rose to a recent peak of 7.38% on October 9, fell to 7.21% on November 17 and rose to 7.26% on December 5.

Higher credit growth is pushing short term FD rates

Banks have been facing record credit growth and they need funds to lend. Fixed deposits are the major source of funds for lenders. However, the growth in credit has been much higher than the growth in deposits, which has created a tight liquidity situation in banking.

“Credit offtake continued to grow, increasing by 20.6% year on year (y-o-y) to reach Rs 156.2 lakh crore for the fortnight ending November 17, 2023,” says the fortnightly report on BFSI by CareEdge. While there was a growth in deposits as well, it was lower. “Deposits too grew by 13.6% y-o-y for the fortnight (including the merger impact). Excluding merger (HDFC Bank and HDFC Ltd) impact growth stood at 12.9%,” says the CareEdge report.

The report expects the outlook for bank credit offtake to remain positive for FY24. “Deposit growth is expected to improve in FY24 compared to earlier periods as banks look to shore up their liability franchise and ensure that deposit growth does not constrain the credit offtake.”

The shortage of funds in banking is likely to keep the short-term interest rate at elevated levels. “The Short-term Weighted Average Call Rate (WACR) stood at 6.79% as of November 24, 2023, compared to 6.13% on November 25, 2022, due to pressure on short-term rates,” adds the CareEdge report.

FD rates are unlikely to fall in near future due to inflation concerns

Retail inflation remains the primary focus area for the RBI. It was double-digit retail inflation that led to a series of repo rate hikes, which compelled banks to raise FD rates. Of late, there have been signs of inflation cooling down, which have raised the expectation of a repo rate cut in the near future. However, if inflation does not cool down, the possibility of a rate cut may appear distant. “Inflation has again been quite volatile in recent weeks, with perishables (specifically onions and tomatoes), pulses and spices showing quite strong upward momentum. This could push the Q3FY24 CPI inflation average to ~5.6%, in line with the RBI’s forecast,” says a research report from Emkay Global Financial Services.

Though retail inflation fell in the first half of this year and came down to 4.25% in May 2023, it shot up sharply in June to 4.81% and in July to 7.44%. So, unless there is a concrete sign of durable reduction in inflation, the RBI is unlikely to go for a repo rate cut. The possibility of any rate cut in the next Monetary Policy Committee meeting also appears remote.

What should you do with your fixed deposit?

While some banks may yet raise their FD rates, any significant hike looks unlikely. A reduction in rates is only a matter of time; the question is whether it will happen in 3 months or after that. Therefore, the current interest rates on FDs can be considered very close to the recent peak in the current interest rate hike cycle.

This may be the last window in a long time for you to deploy your deposits at the prevailing high interest rates.

If you have a high risk appetite, go for deposits in small finance banks. Many of these have been offering high interest rates. Some offer an interest rate of 9% to general citizens and 9.5% to senior citizens. However, remember not to go overboard with FDs in small finance banks.

It is better to keep your exposure within the insurance limit of Rs 5 lakh. For higher deposits, use different types of account in different capacities, which will make you eligible for the Rs 5 lakh cover separately on each account.

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