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Date : 15-jun-2020
News Details
Update Date : 19-Dec-2024
Created Date : 06-Jun-2023
Reference : ET Wealth
The era of rising fixed deposit (FD) rates may end soon and the withdrawal of Rs 2000 currency notes from circulation may play a big role in this. Going by many macroeconomic indicators, it now seems that FD interest rates are nearing their peak in the current cycle of interest rate hikes. If you are planning to invest in fixed deposits, you need to align your investment according to this new development. Here we tell you why a fall in interest rate is imminent and what you can do about it.
REASON FOR BANKS TO HIKE RATE IS FADING
When banks have good demand for loans, they face challenges in securing funds to match this demand. So they raise interest rates on fixed deposits to make these more attractive so that investors would deposit their money with the banks for the higher interest rates.
One of the important ways to assess the liquidity situation in a bank is by looking at the overnight call money rate used in interbank lending. The rate has remained elevated for a few months. The peak rate for the day was at 6.90% on March 29 and April 27 this year. It touched a high of 7% on May 6 and again on May 12.
But it fell to 6.45% on May 19, when the announcement was made that Rs 2000 notes were being withdrawn from circulation. The overnight call money rate has remained in the range of 6.45%-6.55% since then. This is closer to the prevailing repo rate of 6.50%. It indicates that the liquidity challenge of banks is subsiding.
BANKS WILL GET MORE DEPOSITS NOW
As banks start accepting Rs 2000 notes, their deposit base is expected to get a boost. "The policy move to withdraw Rs2K denomination note will likely result in a temporary spurt in system liquidity owing to a higher deposit base – part of which may find its way to a durable deposit base/liquidity addition,” says Madhavi Arora, Lead Economist, Emkay Global Financial Services.
If half of this money remains with the banks for a year, they will be in no hurry to raise interest rates on fixed deposits. "If 50% is in the form of CWP (currency with the public), instead of looking at ‘notes in circulation’ monetary indicator, then the banking system could see an inflow of INR 1.5-1.6 lakh crore in the form of deposits," says Achala Jethmalani, Economist, RBL Bank.
There is a high probability that a good part of these returning Rs 2000 notes will remain with the banks for over a year. "Near-term, we believe that banking liquidity due to currency deposits of Rs 3 lakh crore by September will increase, and we also expect withdrawal of liquidity will be phased out over the next 3-4 quarters. Both banking and durable liquidity can see a near-term increase by Rs 1.5-2 lakh crore," says a note by Axis AMC.
Even experts who are conservative in their estimates expect 25%-30% durable liquidity. “We estimate Rs 0.7-0.9 trillion of durable rise in system liquidity, which in turn reduces (but does not eliminate) the need for the RBI to do OMOs in 2HFY24,” says Arora.
THE DEPOSIT RATES WILL REMAIN MUTED IN THE COMING MONTHS
The US Federal Reserve decided to raise interest rates by 25 basis points (bps) to a range between 5.0% and 5.25%. However, as per an ICICI Direct monthly report, the Federal Reserve has signaled that it may be done raising interest rates for now and amplifying attention to credit and other economic risks. Yields declined after the rate hike as the market expects a possible rate cut by the end of the year, rather than just a pause in rate increases.
Retail inflation, which is the biggest contributor to the interest rate hike, has fallen significantly and remained below 6% for two months — 5.66% in March and 4.7% in April. Domestically, with the RBI pausing rate hike and, thus, giving rise to expectations of the peaking of interest rates in India, the yield curve has shifted downwards in the past one month, stated the ICICI Direct report. The 10-year G-sec rate, which was 7.31% on April 3, has fallen to 7.01% on May 29.
As far as an increase in fixed deposit rates is concerned, it is highly unlikely that any big bank will come up with a significant rate hike now. Moreover, several macroeconomic indicators are signaling that a correction in interest rates is not very far away. "One can expect some softening on rates, which have already eased. Basis our policy rate assumption for CY2023 and spread analysis with the Repo Rate, the 10Y benchmark yield could hover in the range of 6.90-7.30% over the next couple of months," says Jethmalani.
A FALL IN SHORT TO MEDIUM-TERM FD RATES IS NOT VERY FAR AWAY
The RBI’s action on the Rs 2000 note has brought the reversal of the interest rate cycle nearer. "On interest rates, assuming the banking system receives a surplus in liquidity over the next few months, the rates could see a softening, especially on the shorter end of the curve," says Jethmalani.
Interest rates, in general, may see some fall in short- to medium-term deposits. “Rates for the short end of the curve up to 3 years can fall by 20-30 bps as, along with this liquidity surplus, we are also near the peak of the interest rate cycle and can expect cuts in the last quarter of this FY,” says the report from Axis AMC.
WHAT SHOULD YOU DO?
FD rates have mostly risen in the past one year on tenures up to 3 years. The rise in long-term FD rates has been relatively lower. So if you plan to book your FD for a long term, you may have more time to take a call, as these rates are expected to remain at the current level for 3-6 months.
However, if you are planning to go for short- to medium-term FDs with tenure of up to 3 years, it will be better to take advantage of the current high rates and book your FDs as soon as possible, because the chances of a fall in rates in such FDs are higher.
Date : 15-jun-2020
Date : 15-jun-2020
Date : 15-jun-2020
Date : 15-jun-2020
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