fd rates: Higher Bank FD interest rates may fall by 50 bps or more in 2024; You have this much time to invest

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The period after May 2022 has been a highly rewarding journey for fixed deposit investors who saw a significant rise in interest rates. While the highest FD interest rate in major banks generally is in the range of 7%-8%, it went up to 9.5% and above in some small finance banks. However, 2024 may see a complete reversal of the interest rate cycle.

There is, however, still some time left for the rate cuts to start and not all tenures of FDs will be equally impacted.

Here we tell you how long you can enjoy the current high-rate regime and whether it will be the short-term FDs or the long-term FDs that will be impacted more by the rate cuts. What should you do to make the best out of your FDs in 2024?Repo rate cut by RBI is likely to start in first half of 2024
The cycle of hikes that FD rates witnessed in 2022 and 2023 was primarily led by the repo rate hikes by the RBI. However, this repo rate hike cycle ended in February 2023 and since then the central bank has kept the key policy rates unchanged. RBI uses the repo rate hikes to contain retail inflation, which is one of its primary objectives. Though retail inflation in November 2023 surged to 5.5% per annum compared to 4.85% in October, however, it is still within the RBI’s tolerance zone of 2-6%, so the possibility of a repo rate hike is remote unless retail inflation shoots up significantly.

With the likelihood of any repo rate hike being very low, FD interest rates appear to have reached closer to their peaks in the current cycle. However, this will change the moment RBI starts reducing the repo rate, which is not too distant. “Without getting into the timing of rate cuts, given the inflation markers and various advisories, we believe the conditions for rate cuts may exist at some point in H1-2024, especially if there are no further supply chain shocks,” says Adhil Shetty, CEO, Bankbazaar.com.

Most experts believe that the rate cut would not be limited to one small cut, but it could be a bigger cut either in one go or in a staggered manner. “We expect the key policy rates in India will start reducing post-Q2 2024. The exact quantum of reduction will depend on many evolving factors. Our early estimate is a 50 basis points (0.5%) reduction in the calendar year 2024,” says Anshul Gupta, Co-Founder and Chief Investment Officer, Wint Wealth.

Repo Rate Changes

Long-term or short-term FDs, which will see a quick reduction?
While the overall repo rate was hiked by 2.5%, however, the increase in FD interest rates has been much less. For instance, SBI FDs with a tenure of 2 years to 3 years saw a maximum hike of 1.9% from 5.1% in January 2021 to 7% in December 2023. It was followed by 1 year FDs which saw a hike of 1.8% from 5% in to 6.8% during the same period. Longer tenure FDs saw the lowest hike as FDs with 3 year to 5 year tenures saw a hike of 1.45% while FDs with the longest tenure of 5 years and more saw the lowest hike of only 1.1% during the same period.

SBI Historical FD Rates

Date/FD Tenure 1 year 2 years 3 years 5 years
27-Dec-23 6.8 7.00 6.75 6.5
15-Feb-23 6.80 7.00 6.50 6.50
13-Dec-22 6.75 6.75 6.25 6.25
22-Oct-22 6.10 6.25 6.10 6.10
15-Oct-22 5.60 5.65 5.80 5.85
13-Aug-22 5.45 5.50 5.60 5.65
14-Jun-22 5.30 5.35 5.45 5.50
15-Feb-22 5.10 5.20 5.45 5.50
15-Jan-22 5.10 5.10 5.30 5.40
8-Jan-21 5.00 5.10 5.30 5.40

Any cut in the repo rate will have immediate implications for FD investors. “When the key policy rates come down, banks and NBFCs will start reducing interest rates on their fixed and recurring deposits,” says Gupta.
A repo rate cut by the RBI will impact FD rates of all tenures, however, the quantum of the fall will be different on different tenures. “Both long-and short-term FDs will fetch lesser returns. However, the reduction could be much sharper in short-term FDs,” says Gupta.

The medium-term FDs with tenures of 2-3 years have been the biggest beneficiaries of the repo rate hikes, however, a repo rate cut in the near future may take a little longer to impact a corresponding fall in medium term FD rates. “Once this happens, rates will across tenors. However, with maximum value locked in the 1-3 year tenors, we may see intensifying competition among banks there,” says Shetty.

Since long tenure FDs have seen a smaller hike during the repo rate hike cycle so it will not be surprising if the impact of any cut will also be minimal. This means that the window to book FDs at the current high rate will be longer for investors going for long tenure FDs of 5 years or more.

The possibility of rate hikes in few banks still exists
The FD rate hikes in most of the major banks appear to be over, however, the possibility of a few banks raising FD rates cannot be completely ruled out yet. “The core inflation has been stable. So, we do not expect drastic contrarian steps from the RBI in the coming meet. There are also signs from the US that the central banker may cut rates in 2024. Thus, we do not see FD rates increasing meaningfully at the sector level. However, some banks may increase rates by a few basis points to garner deposits to fund their credit growth,” says Gupta.

With less likelihood of a repo rate hike in the near future, the possibility of interest rate hikes on fixed deposits will largely depend on the individual bank’s level of transmission of the repo rate hike. As most of the banks are done with their rate hikes, the possibility of any large-scale rate hikes by major banks is very low.

“As per the latest data available, the weighted average rates on fresh term deposits at commercial banks had seen a decline of 16 BPS between April and October, even as the weighted average rates on new loans rose 23 BPS in the same period. Given this trend alongside other economic markers, the possibility of FD rates going up meaningfully is low. However, banks may, from time to time, introduce FD schemes offering higher than average returns,” says Shetty.

Best time to book your FDs at higher rates
Its only a matter of time that the RBI will start reducing the repo rate and FD rates will follow suit. So, the current period appears to be the best window to book FDs at current high rates. “It’s been a good time to do so for a while. Investors should do so at the earliest,” says Shetty. Short to medium term FDs will be the most impacted when the rate cut starts, so investors looking for the best rate on short to medium term FDs should utilise the current high rates at the earliest.

Even when the repo rate cut starts, it will take a few months for any significant reduction in FD rates. “The best time to book FDs is from now to the next 6 months, as you can lock your money on high interest rates. Investors can also build a ladder of FDs with varied maturity periods to fulfil different financial goals,” says Gupta.

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