Is the golden era of fixed deposit (FD) investors coming to an end? Probably so. One of the primary drivers of fixed deposit interest rates is the repo rate. When the repo rate rises, FD interest rates normally climb, and when the repo rate falls, FD interest rates often fall. After the US Federal Reserve decreased policy rates by 50 basis points (bps) last month, all eyes are on the Reserve Bank of India (RBI) to do the same on October 9, 2024. Remember that the RBI has held the repo rate steady at 6.50% since April 2023. Will India's central bank follow the lead of its US equivalent in reducing the benchmark rate beginning in October 2024? If a rate decrease is on the way, should investors put all of their money into fixed deposits right away?

Shaktikanta Das, the Governor of the Reserve Bank of India (RBI), will announce the Monetary Policy Committee's (MPC) decision on October 9, 2024.

RBI Monetary Policy Committee Meeting on October 9, 204: Will the RBI decrease the repo rate?

"Three developments stand out: softer growth numbers have trickled in recently, inflation has been falling, and the external environment has moved from rate hikes to cuts," according to an HSBC survey.

According to the research, recent statistics reflect a slowing of development, notably in urban sectors, with GDP, manufacturing, motor sales, and other important indicators exhibiting lower performance. This pattern represents a return to past highs rather than a dramatic downturn, with a move from overheated urban regions to lagging rural sectors.

While inflation would have increased somewhat in September owing to the base impact, underlying core inflation remains low. "Normalising temperatures are anticipated to reduce food inflation. Core inflation is anticipated to continue modest as long as global surplus capacity holds prices down. "We expect inflation to gradually fall to around 4% by March 2025," reads the HSBC research paper.

Some encouraging signals, such as strong government cash reserves and growing private sector investment intentions, point to possible growth. "With monetary policy loosening in several advanced economies, the RBI, too, seems to have revealed a preference for looser liquidity," according to the report.

Given all of these variables, the central bank is expected to retain the repo rate at 6.5% at the forthcoming Monetary Policy Committee meeting.

According to Rahul Bajoria, India & ASEAN Economist at BofA Securities, "The RBI is expected to retain the repo rate at 6.50% for the eleventh consecutive MPC meeting. The RBI's forecast for near-term GDP and inflation dynamics remains positive, ruling out any significant risk of a change in monetary policy advice at the next October MPC meeting."

RBI MPC Meeting: Rate Cut on October 9, 2024?

A shift in stance is anticipated. While a rate drop is unlikely, a shift in the RBI's attitude is more plausible. Bajoria adds, "However, incoming near-term data is much more ambiguous, and growth risks look biased to the negative, in our opinion. The RBI may also suggest increasing data dependency in the future, given real rates remain elevated and headline inflation is the closest to the inflation goal it has been in almost twenty-two quarters (on a four-quarter rolling basis). This opens up the potential of the RBI shifting its stance to neutral if it wants to consider a rate drop."

According to many analysts, a rate drop would likely begin with the next RBI MPC meeting in December of this year. According to the HSBC analysis, "We believe the RBI does not benefit from delaying any longer. We believe it will shift its position from hawkish 'removal of accommodation' to 'neutral' at the forthcoming October 9 policy meeting, followed by 25 basis points in repo rate decreases in December and February."

What approach should FD investors use now?

So, whether it is December 2024 or February 2024, a rate drop is on the way. What should fixed deposit investors do now? According to Nirav R Karkera, Head of Research at Fisdom, "This is an ideal time for fixed income investors to lock in rates at elevated levels. Fixed-rate propositions may be preferred over floaters, given the balance of the case for future rates between status quo and falls."

Investors who have previously laddered fixed deposits over time frames to improve liquidity may be vulnerable to reinvestment risks, he warns. "It may now make sense to move away from a ladder and move to a strategy closer to a barbell where longer-term savings lock yields at higher rates, and shorter tenure FDs are maintained to service liquidity and not reinvestment as much."

When will banks begin decreasing interest rates on FDs?

Given the likelihood that the rate reversal would begin around the end of the current calendar year, Karkera believes that the new year will begin with lower policy rates, which will then trickle into deposit rates."However, one must examine how, despite policy rates playing a role in influencing FD rates, the robust credit demand and service environment might lead to competitive deposit pricing by numerous banks, resulting in relatively high rates being provided for a prolonged period. The justification for higher fixed deposit rates remains in favor of FD savers," Karkera says.