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Will FD rates go up further on the back of RBI’s upcoming MPC meeting?


The Reserve Bank of India has been raising interest rates rapidly and since May of the current fiscal year, there have been four straight rate hikes, resulting in a total repo rate hike of 190 bps including the repo rate which was raised by 50 basis points and is now 5.90%, according to an announcement made by the Monetary Policy Committee (MPC) in September 2022. and the last 4 four consecutive hikes have resulted in bank fixed deposit rates going up to give inflation-beating returns at some private and small finance banks. The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is scheduled to convene in December, and experts expect a further increase in the repo rate, which might also cause fixed deposit rates to rise further.

Expectations from RBI’s upcoming MPC meet

Suvodeep Rakshit, Chief Economist, Kotak Institutional Equities said “The RBI’s December policy meeting will likely see the MPC hiking repo rate by 35 bps; lower than the last three hikes of 50 bps. However, the decision is unlikely to be unanimous. The domestic inflation trajectory while remaining above the upper limit of the RBI’s inflation target band is gradually moderating. Domestic demand remains steady though risks of a global demand slowdown are increasing which is likely to impinge on India’s growth. The external sector situation remains uncertain. Inflation in most developed economies remains elevated but showing signs of peaking. The US Fed has not surprised with a more-than-expected hawkish statement along with indications of a slower pace of hikes. Commodity prices have also come off, and recent fall in crude prices is also encouraging though uncertain whether it will sustain. These factors will provide some confidence to the RBI in slowing the pace of rate hikes and, possibly, pausing soon to assess the impact of the past rate hikes. However, a sticky core inflation and, more recently, higher cereal prices and increasing food inflation will keep the RBI cautious. A 35 bps hike will signal a mix of cautiousness and comfort while keeping all options open (including a pause or a smaller hike) for the February policy depending on the conditions.”

Mr. Mitul Shah – Head of Research at Reliance Securities said “The recent labour data and relatively lower inflation print will reinforce expectations for a smaller 50 bps Fed rate hike on Dec. 14 and perhaps signal a further slowing in the pace of rate increases early next year. RBI’s rate-panel is expected to increase repo rates by 25-35 bps in its meeting from 5-7 Dec ‘22. The run-up to the exercise for the Budget is building up with job creation and a step-up in government capex, being the primary focus. We expect a recovery in the coming quarters led by softening of commodity prices and monetary easing by central banks which is likely to boost demand going ahead.”

Radhavi Deshpande, Joint President & Chief Investment Officer, Kotak Mahindra Life Insurance Company said, “Having orchestrated a little more than two and a half percent move in the overnight operative rate through policy rate hikes and liquidity unwind measures, monetary policy committee (MPC) can now afford to embark on baby steps from here on. Incremental momentum in inflation is showing signs of moderation owing to falling commodity prices amidst global growth slowdown. Hence MPC focus can shift to assessing the lagged impact of past policy actions. We expect a 25 bps in the coming policy and a data dependent stance going forward.”

Churchil Bhatt, Executive Vice President & Debt Fund Manager, Kotak Mahindra Life Insurance Company said, “We are witnessing early signs of peaking inflation as a result of sharp monetary tightening witnessed in the recent past. Since monetary policy acts with a lag, the monetary policy committee (MPC) may want to take a bit of a breather in its fight against inflation to assess the impact of past policy actions. In light of the above, upcoming policy meeting may see only a 25 bps policy rate hike. The MPC may also hint at the likelihood of a subsequent pause in monetary tightening, especially if CPI inflation continues its downward trajectory in coming months. However, a pause in policy tightening, if any, should not be interpreted as a promise of a Pivot just yet.”

Deepak Agrawal, CIO (Debt), Kotak Mahindra Asset Management Company said, “Federal Reserve is likely to raise rates by 50 bps in Dec 22 policy, hiking overnight rates by cumulative 425 bps during CY 2022. Average CPI in India for FY 24 is expected in the band of 5.00-5.25%. Assuming 100 bps real rates, terminal repo rate in India could be ~ 6.25%. We expect a 35 bps hike in the Dec 22 policy, along with a change in monetary policy stance from “withdrawal of accommodation” to “neutral” indicating further action to be data dependent. Post this hike, the overnight rates in India would have increased by ~ 300 bps during CY 2022.”

Will the fixed deposit (FD) rates go up further?

Prashant Joshi, Managing Director and Head- Consumer Banking Group, DBS Bank India said “The sequence of rate hikes that began in May 2022 has continued and banks have raised their FD interest rates. With RBI’s “withdrawal of accommodation” stance as well as growth in credit outstripping growth in deposits, FD rates may see a further increase. Fixed deposits with reputed banks offer safety, liquidity and assured returns. As such, FDs need to be part of every customer’s investment allocation depending upon the risk profile of the customer. For example, we have seen that senior citizens prefer FDs as they provide fixed returns and are insulated from market volatility. Since FDs offer a fixed interest rate, they are also an excellent option to meet contingency needs or unforeseen expenses, such as medical emergencies or unplanned travel.”

He further added that “One can make the most out of fixed deposits by linking a savings account with a bank FD or starting a recurring deposit from a savings bank account. One can choose an investment plan in line with financial needs such as a cumulative plan or an interest pay-out plan. Apart from these options, one can also explore the fixed deposits ladder strategy distributing the money across different tenors ensuring optimum utilisation of resources.”

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