The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is set to convene for its bi-monthly review in December 2024. Following a three-day deliberation, the committee will announce its decision on the outcome of the meeting, including any changes to the repo rate, on Friday. The RBI has maintained the repo rate at 6.5% since February 2023, and experts widely anticipate that the central bank will continue to hold the rate steady for the eleventh consecutive meeting.
Possibility of a RBI Rate Cut
In a recent report, brokerage firm Nomura suggested that the RBI’s MPC could consider a rate cut during its December 2024 meeting. Nomura forecasts a potential reduction of one percentage point in the repo rate. This prediction is driven by economic factors, including sluggish GDP growth and a slowdown in credit expansion, which Nomura believes may require the RBI to make policy adjustments to stimulate the economy.
The repo rate is the interest rate at which commercial banks borrow funds from the central bank. A decrease in the repo rate typically lowers borrowing costs for banks, making credit more accessible for businesses and individuals. In turn, this encourages investment and economic activity. Conversely, an increase in the repo rate raises borrowing costs, which can curb spending and investment.
How RBI uses Repo Rate
The RBI uses the repo rate as a key tool for managing inflation. When the economy is growing too quickly, leading to rising prices, the central bank may increase the repo rate to discourage excessive spending and investment. On the other hand, during periods of economic slowdown, the RBI may reduce the rate to encourage borrowing, investment, and overall economic activity.
The RBI’s repo rate significantly influences fixed deposit (FD) interest rates offered by banks. When the RBI raises the repo rate, banks often adjust their FD rates upwards to attract more deposits. Conversely, a reduction in the repo rate typically leads to a decrease in FD rates, which may not be favorable for investors looking for higher returns.
For example, a 0.25% increase in the repo rate often results in an equivalent rise in FD rates. However, if the RBI cuts the repo rate, FD rates could drop, potentially reducing returns for investors. In the October MPC meeting, the RBI shifted its policy stance from accommodative to neutral, signaling that elevated FD rates may soon decrease. Investment experts recommend taking advantage of the current high FD rates before a potential decline.
Banks Revise Fixed Deposit Rates Ahead of RBI MPC Meeting
In anticipation of the upcoming RBI MPC meeting, several banks have adjusted their fixed deposit rates.
Karnataka Bank:
Effective December 2, 2024, Karnataka Bank updated its fixed deposit interest rates for both callable and non-callable deposits. The new rates range from 3.5% to 7.50% for general citizens, with tenures spanning from 7 days to 10 years. Senior citizens can benefit from a higher interest rate of 8% on a 375-day tenure.
Canara Bank:
On December 1, 2024, Canara Bank revised its fixed deposit rates for deposits below ₹3 crore. The updated rates range from 4% to 7.40% for general citizens, and 4% to 7.90% for senior citizens on callable deposits.
YES Bank:
YES Bank adjusted its interest rates for fixed deposits below ₹3 crore, effective November 5, 2024. The bank reduced the interest rate on 18-month fixed deposits from 8% to 7.75% per annum.
IndusInd Bank:
IndusInd Bank recently updated its fixed deposit interest rates for deposits below ₹3 crore. The bank now offers interest rates ranging from 3.50% to 7.99% for regular citizens, and 4% to 8.49% for senior citizens, with tenures spanning from 7 days to 10 years.
IDFC FIRST Bank:
IDFC FIRST Bank also revised its fixed deposit interest rates for deposits below ₹3 crore. Regular citizens can now enjoy interest rates ranging from 3% to 7.90%, while senior citizens are eligible for rates between 3.50% and 8.40%. The highest rates of 7.90% for regular citizens and 8.40% for senior citizens apply to deposits with a tenure between 400 and 500 days.
As the RBI’s MPC meeting approaches, banks are adjusting their FD rates in anticipation of potential changes in monetary policy. Investors may want to consider locking in favorable rates before any adjustments are made.
Also Read: Muthoot Microfin reduces interest rates on two types of loans
