RBI monetary policy: A rate hike scenario is likely to make FD rates attractive

The Reserve Bank of India (RBI) is set to announce the bi-monthly monetary policy later this week. The central bank is expected to hike the repo rate yet again to tame multi-year high inflation. Notably, any change in RBI’s repo rate will have an impact on the lending and deposit rates of the bank. In the last two policies when RBI hiked the repo rate by 90 basis points, both benchmark lending rates and deposit rates have been increased by the banks as well. In a rate hike scenario, fixed deposits become attractive as banks usually hike interest rates on this investment mechanism. FDs are one of the safest and most traditional forms of investment in India, as it offers guaranteed return and is risk-free.

RBI began the rate hike cycle in May with a 40 basis points hike in repo rate, which followed another rate hike of 50 basis points in July. That said, the repo rate is currently at 4.90%.

RBI’s latest report of scheduled commercial banks showed that the weighted average domestic term deposit rate (WADTDR) on outstanding rupee term deposits increased by 6 basis points from 5.07% in May 2022 to 5.13% in June 2022.

RBI is an inflation trajectory central bank and the policy outcomes surround the movement of CPI. Currently, inflation is at 7.01% in June and has been above RBI’s comfort zone of 6% for the sixth-consecutive month.

In June 2022 policy, RBI predicted inflation to stay above 6% till Q3 of FY23 and only come below 6% fractionally in Q4. On the assumption of a normal monsoon in 2022 and an average crude oil price (Indian basket) of $ 105 per barrel, RBI projected inflation at 6.7% in 2022-23, with Q1 at 7.5%; Q2 at 7.4%; Q3 at 6.2%; and Q4 at 5.8% with risks evenly balanced.

In a research report, Yes Bank analysts Indranil Pan, Deepthi Mathew, and Radhika Piplani said, “we continue to see depreciation pressures for USDINR as India’s import cover as a % of FX reserves has shrunk to close to 10 months while the trade deficit is expected to say wide. The RBI has been quite active in the spot market to prevent USDINR breaching the psychological level of 80.”

“Even as we have seen the worst of inflation in India, RBI is likely to continue to front-load its rate hikes to prevent a widening of the interest differential. We expect the RBI to hike policy rate by 50 basis points in August while USDINR is anticipated to depreciate to 81-81.50 level by March 2023,” the analysts added.

The majority of experts anticipate RBI to hike interest rates by 25-50 basis points in this upcoming policy. In a rate hike case, irrespective of the quantum of increase, the deposit schemes are likely to be attractive.

Here are the latest interest rates offered by major banks on their FDs:

SBI fixed deposits below 2 crore:

Currently, SBI offers a 4.60% rate on 211 days to less than 1-year tenure to the normal category, while senior citizens earn 5.10% on the same tenure. Further, the rate is 5.30% and 5.35% for the normal category on tenures like 1 year to less than 2 years and 2 years to less than 3 years respectively, on the other hand, elderlies earn 5.80% and 5.85% on these two tenures.

A 5.45% and 5.95% interest rate applies to the normal category and senior citizens on 3 years to less than 5 years tenure. While the rate is 5.50% and 6.30% on 5 years and up to 10 years tenure for normal and senior citizens.

The interest rate is 2.90-4.40% for the normal category on tenures starting 7 days to 210 days. While senior citizens earn from 3.40-4.90%.

HDFC Bank FDs below 2 crore:

The interest rate on FDs here ranges from 2.75% to 4.65% in the regular category on maturity period from 7 days to less than 1 year. While the interest rate ranges from 3.25% to 5.15% for senior citizens on these tenures.

HDFC Bank offers a 5.35% rate to the normal category and a 5.85% rate to senior citizens on tenures from 1 year to 2 years.

A normal category customer earns 5.50% on 2 years 1 day – 3 years tenure, while the rate is 5.70% and 5.75% on 3 years 1 day- 5 years and 5 years 1 day – 10 years tenures respectively.

Meanwhile, a senior citizen earns a 6% rate on 2 years 1 day – 3 years tenure, 6.20% on 3 years 1 day- 5 years tenure, and a 6.50% rate on 5 years 1 day – 10 years.

ICICI Bank FDs below 2 crore:

The bank offers a 2.75% to 4.65% rate on a normal category for tenures from 7 days to less than 1 year. A senior citizen earns from 3.25% to 5.15% on these tenures.

ICICI gives 5.35% for tenures from 1 year to 2 years to the normal category, while senior citizens receive 5.85%. The bank offers a 5.50% rate on 2 years 1 day to 3 years tenure to a normal category, on the other hand, the rate is 6% on the same tenure for senior citizens.

Meanwhile, a normal category customer earns 5.70% on 3 years 1 day to 5 years tenure and elderlies get a 6.20% rate. Further, the rate is 5.75% on 5 years 1 day to 10 years for the normal category and that of senior citizens is 6.50%.

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