RBI MPC Meet: How your fixed deposit rates could be affected in the near future

FD Rate: In its latest monetary policy update on Friday, the Reserve Bank of India (RBI) chose to maintain the repo rate at its current level and maintained a neutral stance. Therefore, the interest rate on short-term 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 about the interest rates they should offer.

A higher repo rate incentivizes banks to increase their interest rates on fixed deposits to attract more depositors, while a fall in rates forces banks to lower their rates on FDs.

“The rate cut would have been aimed at supporting growth, but they kept an eye on the ball of inflation. The next scheduled 50 basis point rate cut will be in February 2025,” Rajiv Anand said , deputy general manager of Axis. Bank Ltd.

“In its MPC meeting concluded today, the RBI kept its policy rates unchanged, in line with its continued objective of sustainably aligning the CPI with the 4% target. It is pertinent to note that it was not unduly disrupted by a sharp moderation in GDP growth in the second quarter, which he viewed as transitory. He instead opted to wait for further confirmation of the cooling in the CPI, particularly given that. two high digits since the last RBI meeting, which however reduced the CRR by 50 basis points, easing the liquidity crunch caused by aggressive intervention in the foreign exchange market in recent weeks. moderate over the next few months and is expected to reach around 4% by Q2FY26, while GDP projections have been revised downward by the RBI we continue to expect a downward cycle. light rates from of February,” said Piyush Baranwal, Senior Fund Manager (Fixed Income), WhiteOak Capital Asset Management Ltd.

Effect on term deposits

The repo rate was last raised by the RBI in June 2023, after which it remained stable at 6.5%. A series of gradual hikes totaling 2.5% until February 2023 has prompted banks to hike FD rates significantly. However, with 21 months having passed since the last repo rate hike, it appears interest rates are near their peak. Although the central bank has maintained the status quo on the repo rate this time, interest rates are expected to decline in the near future.

Although the current rate remains the same, a drop is expected to occur at the next meeting, leading to a reduction in interest rate offers. Anand noted that the gap between repo rate and one-year interest rate offers for fixed deposits remains wide.

Several banks have adjusted their FD interest rates ahead of the upcoming MPC meeting. Anand predicts that further changes could come as interest rates may be cut in February 2025. Although the expected rate cut is minimal, it could result in lower rates for short-term deposits.

Anand explained that a reduction in the cash reserve ratio would result in lower interest rates on deposits, leading to a potential decline 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 information regarding the RBI’s monetary policy.

“The RBI’s decision to keep the repo rate at 6.5% keeps borrowing costs stable. However, the reduction in CRR by 50 basis points to 4% is a game changer, injecting Rs 1.16 lakh crore of liquidity into the banking system. The move is a boon for debt mutual funds, especially liquid and short-duration funds, as it stabilizes returns and strengthens credit conditions. For equity markets, increased liquidity is a positive signal for banking stocks. With increased lending capacity through reduction in CRR, banks are able to improve their profitability, which could spark bullish sentiment across the financial sector, including NBFCs. Savvy 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 bond yields will continue to be supported by more liquidity injection measures such as OMO purchases by the RBI and continued slowdown in growth as well as slowing inflation, and investors can take advantage of any rise in yields to increase their allocation to fixed income. Investors with medium to medium income A long-term investment horizon may be interested in funds with a duration of 6 to 7 years with predominant sovereign holdings, because they currently offer a better risk-reward ratio. Investors with an investment horizon of 6 to 12 months can view money market funds as returns are attractive in the 1 year segment of the curve. what the benchmark 10-year bond yield gradually declines towards 6.50 per cent by the fourth quarter of FY2025,” said Puneet Pal, Head of Fixed Income, PGIM India Mutual Fund.

“Fixed income investing prefers a stable, almost ‘boring’ environment and that is exactly what has been proposed. Investors should continue to use fixed income for effective portfolio construction. A dumbbell strategy with purchase of short-term corporate bonds with long-term G-Secs and banks Infra bonds are suggested to benefit from carry as well as potential capital gains,” said Vishal Goenka, co-. founder from IndiaBonds.com.