Posted on Dec 28, 2024
Top Reasons Why Fixed Deposits May Continue to Earn You Interest at Upto 9.30%
It’s been a fascinating two-year journey for fixed deposit investors, with interest rates climbing as high as 9.30% per annum. They earned, enjoyed, and laid a strong foundation for their financial journey. The resounding volume of fixed deposits opened across banks in India indicates the growing shift towards a fixed deposit.
According to the RBI report, from October to December 2023, private banks received fixed deposits worth INR 1.59 trillion. Public sector banks, meanwhile, received INR 1.18 trillion worth of FDs. Small finance banks received fixed deposits worth INR 8,390 crore during the period.
Wow! It remains a fixed deposit mania in India, and rightly so given the assurance it gives to investors every time. What’s more, the great run for fixed deposits may continue further. Here we list out the reasons. Check them out!
Vegetable Prices Easing, But Still Remains Above the Last Year’s Level
Good News! Vegetable inflation is easing and giving us some space to save. Retail prices of tomatoes, onions and potatoes have decreased by as much as 20-25% in December 2024. Even then, prices are higher than what was in December last year. As per vegetable traders, prices rose so much in the last six months that coming to last year’s level will take time.
What’s More, Grocery, Consumer Goods May be 5-20% Costlier
Be prepared for the price rise in groceries and consumer goods as Fast-moving Consumer Goods (FMCG) companies will likely pass on the rise in commodity costs to the consumers. The rising customs duty is also a concern. Tea, edible oil, soap, skin cream and other household items will likely be 5-20% costlier. The production cost of companies has grown owing to a 22% rise in import duty on edible oil in September 2024 and upto 40% in the calendar year 2024.
The Repo Rate Cut May Not Happen in RBI’s MPC Meet in Feb 2025
With vegetable prices still higher than last year’s level despite the recent fall and increasing chances of consumer goods becoming costlier in the coming months, the Reserve Bank of India (RBI) may not cut the repo rate, it will then remain standstill at 6.50%. No repo rate cut means the loan interest rate will not drop, which will mean no drop in fixed deposit interest rates that currently stand at upto 9.30% per annum. Even if the RBI cuts the repo rate to lift economic growth, the extent of reduction may not be significant, allowing banks to carry on with high FD rates.
High FD Rates May Continue as Banks Will Continue to Fight Liquidity Issues Despite 0.50% Cut in the CRR
For long, banks were battling with liquidity issues that further prevented them from extending loans at lower interest rates. Considering these concerns, the RBI slashed the Cash Reserve Ratio (CRR) by 0.50% to 4%.
CRR is the sum on which banks don’t earn. They need to park a specific sum as per the prevailing CRR rate with the RBI for no interest.
With the RBI slashing the CRR to 4% from the earlier 4.50%, banks will need to deposit less with the central bank. This will allow banks more liquidity to lend and increase their credit growth. However, the proposed Liquidity Coverage Ratio (LCR) norms, effective from April 2025, will likely negate the effects of the CRR Cut.
The new LCR norms say that banks will have to compulsorily invest an amount equaling their 30-day outflows in high quality liquid assets (HQLAs). The liquidity expected to be infused into the banking system via the CRR cut is way lower than the demand for funds, as per Anshul Chandak, Head of Treasury, RBL Bank.
With banks still requiring more cash, they will likely keep FD rates higher to attract inflows and bridge the gap between demand and supply.
References
Private banks outpace public peers in raising FDs - Banking & Finance News | The Financial Express
Retail prices of staple veggies drop 25%, but still higher than last year - The Economic Times
