Fixed Deposit (FD) rates in India to rise further? What RBI annual report 2017-18 hints at
The RBI annual report 2017-18 hints that the high Fixed Deposit (FD) rate regime, triggered by recent repo rate hikes by the Reserve Bank of India, is likely to continue in the next financial year.
The RBI annual report 2017-18 hints that the high Fixed Deposit (FD) rate regime, triggered by recent repo rate hikes by the Reserve Bank of India, is likely to continue in the next financial year. Repo rate is the rate at which the central bank lends to the banks. Following the recent repo rate hikes, the interest on EMIs went up but several banks also increased FD rates on select term plans.
The RBI's Monetary Policy Committee hikes or lowers the repo rate, as and when required, to keep a check on inflation, among other things. When the inflation goes very high, the Central bank tends to hike the key lending rate and vice versa.
In the current financial year, RBI expects headline inflation to be at 4.6 per cent in Q2 and 4.8 per cent in the second half of the financial year; while in 2018-19, inflation could touch 5.0 per cent, according to the report, which warns, "A further rise in households’ inflation expectations in the June 2018 round of the Reserve Bank’s survey warrants caution, especially to prevent wage-cost spirals from developing."
The RBI report further says, "Headline inflation which averaged 4.8 per cent during Q1:2018-19, is likely to face upside risks over the rest of the year from a number of sources, warranting continuous vigil and a readiness to head off those pressures from getting generalised." The factors that may increase the headline inflation in the year include, rising global commodity prices, especially of crude oil, recent global financial market developments, the impact of HRA revisions by various state governments.
In case the inflation goes further up, than what is expected, in the next financial year, the central bank may consider revising the key rate. The RBI aims to maintain the Consumer Price inflation (CPI) target of 4. The report says, "The conduct of monetary policy will continue to be guided by the objective of achieving the medium-term target for CPI inflation of 4 per cent within a tolerance band of +/- 2 per cent, while supporting growth."
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The RBI had increased the repo rate 25 bps in June 2018 and again in August in view of "hardening of inflation and inflation expectations, while continuing with the neutral stance." Several banks later increased FD interest rate.
In case, inflation doesn't go further up, the RBI would likely not make any change in the repo key, which in any way will be a good news for Fixed Deposit investors.