Rates May Have Peaked: Why The RBI's 'Pause' May Well Be A 'Pivot'

Earlier this month, the Monetary Policy Committee (MPC) announced a pause in its rate hike cycle. The Reserve Bank of India Governor, Shaktikanta Das, emphasised that the pause does not mean that rates have peaked, for inflation still needs handling. It’s a pause, not a pivot to cheaper money.

However, there is good reason to believe that the pause will indeed become a pivot, given the reality that globally almost all economies are expected to slow down this calendar year. 

The International Monetary Fund’s latest World Economic Outlook says growth will bottom out this year before rising next year. Our software companies are all reporting slower growth, and lowering guidance for next year.

Tata Consultancy Services disappointed the markets with its fourth quarter results, and Infosys has sharply cut its guidance for 2023-24. This suggests that the world’s largest economy, the US, which is the largest market for our infotech companies, is weakening.

The World Bank has forecast India’s GDP growth in fiscal 2023-24 at 6.3 per cent, lower than this year. But, on the plus side, retail inflation is easing, and the March Consumer Price Index fell to 5.66 per cent.

Against this backdrop of falling growth, geopolitical uncertainties, and falling inflation, it is unlikely that the MPC will really go for a rate hike even if inflation remains sticky around current levels.

For you as a saver or borrower, this implies that deposit rates have probably peaked, and lending rates, whether you are going to buy a home or a car, will not rise much from current levels. It may be a good idea to stick to floating rates of borrowing so that you gain if rates fall.

A look at where bank fixed deposit rates stand now is instructive. If one looks at the range of rates for various tenures, the highest rates are for tenures ranging from just over one year to two years.

This suggests that banks do not want to offer higher rates for periods beyond that when, normally, rates should be higher for longer tenures. 

The State Bank of India offers its highest rate of 7.1 per cent for a special 400-day deposit, which means it does not want to lock itself in at higher rates for longer tenures.

HDFC Bank’s top rate is 7.1 per cent for the 15-18 month bucket, and ICICI Bank offers the same rate for 15-24 months. HDFC Bank’s really high rate of 7.75 rate is for senior citizens investing in tenures of more than five years.

Senior citizens, given that their deposits tend to be more stable, get the best deal, especially for longer tenures. All these three banks offer rates in the range of 7.5-7.75 per cent, give or take a few basis points depending on tenure.

The takeout: book your fixed deposits now, if you like certainty of income over taxation of that income. Once the slowdown becomes real, banks will cut rates faster than you may think possible.