FD Interest Rates: Is There No Room For Hike In Saving Deposit Rates After Latest Status Quo?

There is a direct relation between RBI policy repo rate and banks' fixed deposits. A rate hike comes as good news, but a pause keeps the interest rates on FDs stable although very little room for increase. But a rate cut could lead to chalk down in FD rates. In the latest monetary policy, RBI kept the repo rate unchanged at 6.5% for the fifth consecutive time. Expectations are that the aggresive rate hike cycle has ended, and 2024 will bring in the season of rate cuts. So does that mean that after the December 2023 policy, days of earning a higher rate of returns could change course?

RBI has maintained the status quo in the repo rate since the start of FY24 to observe the rate hike impacts on the economy and businesses. And this has also significantly slowed down the hike bandwagon in FD rates by banks and NBFCs. But FDs, savings accounts, and recurring deposit rates are already at high levels due to RBI's aggressive rate hike cycle last year.

After Russia invaded Ukraine in early 2022, RBI including other central banks went for aggressive hiking in interest rates to tame extreme inflation pressure. From May 2022 to February 2023, RBI has hiked the repo rate by 250 bps.

On Friday, RBI governor Shaktikanta Das revealed that the weighted average domestic term deposit rates (WADTDRs) on fresh deposits and outstanding deposits rose by 228 bps and 172 bps, respectively, during the same period.

Das pointed out that net inflows under external commercial borrowings (ECBs) and non-resident deposit accounts are much higher than last year. As per the data, net inflows of ECBs to India were US$ 3.9 billion during April-October 2023 as against net outflows of US$ 4.2 billion a year ago. Non-resident deposit accounts witnessed higher net inflows at US$ 5.4 billion during April-September 2023 as compared with US$ 2.8 billion a year ago.

Further, Das also said that system liquidity, as measured by the net position under the liquidity adjustment facility (LAF), turned into deficit mode for the first time in September 2023 after a gap of nearly four and a half years since May 2019. Deficit liquidity conditions persisted during October and November prompting large recourse to the marginal standing facility (MSF) by banks. He added that in parallel, utilisation of the standing deposit facility (SDF) has also been high.

That is why, RBI also kept the SDF rate unchanged at 6.25%, and MSF along with bank rate at 6.75% each.

How RBI Repo Rate Impact FD Rates:

As per Appreciate Wealth's website, when we talk about the impact of the repo rate increase on financial instruments, it's crucial to understand how this affects FD rates after the repo rate increase. The connection between the repo rate and FD interest rates is direct and significant.

The stock broker's blog further explained that banks adjust FD rates in line with repo rates to manage borrowing costs and attract deposits. Not aligning rates can lead to liquidity issues when repo rates rise, and reduced profitability and competitiveness when they fall. This alignment ensures financial stability and market relevance.

"The repo rate increase impact on FD is a key indicator for investors monitoring their fixed deposit returns. As the repo rate fluctuates, it directly influences the interest rates on FDs, shaping your investment outcomes," it added.

Is there more room for a hike in FD rates after the December 2023 policy?

The majority of experts are split in opinions.

SBI Capitals on the MPC outcomes said, "Expectedly, the MPC decided to keep its policy repo rate unchanged at 6.50%, by unanimous vote. All other policy rates such as MSF, bank rate, and SDF also remained unchanged. MPC retained its stance of being focused on the withdrawal of accommodation, by a similar 5-1 vote as last time. The action on policy rates and stance was entirely on expected lines, and was owing to the inflation moving slowly towards the target, even as growth has surprised to the upside, both in India and globally."

But SBI Capitals also said, "Regulatory interventions, including changes in risk weights, imply the potential for additional increases in bank lending and deposit rates."

Anil Rego, Founder and Fund Manager at Right Horizons said, the banking sector is the most sensitive to changes in rate cycles and has been a major reason for incremental earnings in FY23 and in H1 of FY24 benefitting from the hikes and credit growth being robust and persistent.

Further, Sreeram Ramdas, Vice President, Green Portfolio PMS said that the banking sector may benefit from the steady interest rate environment, as it aids in better margin management.

But a rate cut from the early 2024s could lead to cuts in FD rates as well. However, as long as the rate cut scenario is off the table currently, depositors can enjoy a higher rate of returns on FDs.

Rego said prolonged rate cuts will eventually lead to narrowing NIM but we expect rate cuts to begin in the last quarter and hence the trend in the banking sector is likely to continue in FY24. NBFCs will be best positioned to benefit from cuts in rates as credit growth will improve followed by banks. Also, credit-sensitive sectors like auto and real estate will see higher demand.