MPC: Will RBI's likely status quo give depositors another chance to lock in high interest rates?

RBI's decision to increase interest rates was aimed at containing inflation by curbing demand.

The Monetary Policy Committee of the Reserve Bank of India headed by governor Shaktikanta Das started its meetings on June 6 and is expected to announce a decision on interest rates on June 8.

While borrowers want rates to be cut, fixed deposit investors are looking to earn a little bit more. The RBI, however, may keep rates unchanged, experts said.

Rate action so far

The central bank has increased the policy repo rate by 250 basis points to 6.5 percent since May 2022. However, it kept the rate unchanged in April, suggesting to some analysts that the cycle of increasing rates is ending.

The steady climb in the repo rate led to higher interest rates, especially in the form of rising yields on short-term bonds and deposits. The yield on one-year paper went up to 7.4 percent in March 2023 from 4.3 percent in March 2022.

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Increasing interest rates was aimed at containing inflation by curbing demand. Aggressive monetary tightening by the US Federal Reserve also made many central bankers, including the RBI, respond with rate hikes.

In April, the MPC projected retail inflation at 5.2 percent for 2023-24, assuming a normal monsoon and an annual average crude oil price (Indian basket) of $85 per barrel. For 2023-24, real GDP growth was projected at 6.5 percent.

Will rates change?

Although the markets are in a hurry to see a rate cut and yields in the bond markets indicate lower rates sooner than later, experts are not calling a turn in the rate cycle any time soon. The 10-year benchmark G-Sec bond yield has dipped to 6.98 percent from a high of 7.47 percent in March 2023 for the current calendar year.

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Suvodeep Rakshit, a senior economist at Kotak Institutional Equities, expects a pause from the RBI in the June policy without changing its stance.

“A wait-and-watch would work best now with the stance remaining cautious. We do not expect the RBI to change its inflation and GDP growth forecasts for FY2023-2024,” he said.

Expectations of a recession in key economies such as the US have led to a moderation in commodity prices, especially crude oil. Softer oil prices are beneficial for India from an inflation point of view.

Deepak Panjwani, head of bonds at GEPL Capital, said crude oil prices may slide further in the near term on weak demand. He expects the MPC to continue with the pause on the repo rate.

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Some experts said the RBI will act on interest rates cut only when inflation falls to the target level of 4 percent and this is expected to be a gradual process.

“The CPI, the core CPI and WPI have fallen in recent months. This is in line with the inflation prints that we are seeing globally,” said Parijat Agrawal, head of fixed income at Union Asset Management Company. “It gives confidence in our assessment that drivers of inflation have softened and high interest rates and tighter financial conditions are working their way through economies.”

He expects the MPC to maintain the status quo on policy rates.

What should you do?

Though the RBI may keep interest rates unchanged, the yields on bonds may get adjusted slowly as more information about macro-economic indicators such as inflation, GDP trickles in. The progress of the monsoon is a key monitorable. The right distribution of rainfall near the long-period average can help lower food inflation and revive the rural economy.

Many savvy investors are parking their money in long-duration funds and gilt funds, expecting a rate cut by the end of this financial year. Over the past nine to 12 months, they have been rewarded for the risks they took as yields came down. In the year ended June 6, long-duration funds gave returns of 12.1 percent on average, as per Value Research. But the rally may not continue uninterrupted. In case of negative surprises, yields can go up as well.

“We expect the 10-year benchmark to test 6.90 percent tomorrow (June 8) and later 6.84 percent if the RBI lowers the inflation projection,” said Panjwani. “In the next three months, the 10-year benchmark may move in the range of 6.85 to 7.15 percent.”

This can be a good time to lock in money in long-term fixed deposits, if your cashflow allows you to do so.

Home loan consumers may have to wait longer for a repo rate cut to lead to fewer equated monthly instalments. However, some banks may offer lower rates to woo existing home loan customers.