Seeing the overall development and economy doing good some people feel that interest rates are going to decrease gradually in 2024 and by 2 years settle somewhere at 5%. Do you feel the same way?
Yes possible. If you check out the bank interest rates of various psu private and small finance bank you will notice that for short tenor fd rates are higher whilst long term for 10 years rates are lower. This is a clear indication that banks do not want to offer higher rates for longer term if the rates fall in future.
The highest rate is given by small finance bank for shorter tenor such as 444 days or 888 days.
After the finance ministry/rbi asked banks to narrow down the deposits to lending gap, there is a expectation that rates might go up in the next couple of months and if you get a higher rate for longer tenor book it
Example two years ago yes bank was offering 7.75 for 10 years. Now its lower.
Same with dcb bank.
I always wondered with the lending growth that is clearly visible in bank balance sheet how come deposit rates have not increased. Was talking to a senior banker who informed that banks have realised that customers nowadays close their existing fd and rebook the same when rates rise. The classic case was seen in NRI USD FCNR deposits where rates increased from 3 to 6 percent. Almost all of the customers prematurely closed the fd and rebooked the same at higher rate after one year across banks. This had a direct impact on bank cost
So bankers do not want to increase the rate for deposits but how do they get additional money. It seems they go for bond issue for specific amounts by offering higher rates. The logic is the cost is restricted to the specific amount instead of their entire deposit portfolio. This has led to deposits / advances gap widening
So in a nutshell bank will be forced to increase the rates but longer term outlook it is going to be in the range what u have mentioned
So options are
Small finance bank upto 5 lakh and spread it among family members
Post office which gives almost closer to bank fds
Central govt backed bonds
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@umesh4 - Not so soon I think because India is still showing strong demand and growth and inflation is not totally under control, so the repo rate may be kept unchanged for sometime until RBI has reasonable conviction that the demand is slowing or inflation is getting under control.
Banks don’t just look at repo rate to fix their interest rates. According to a very recent RBI report, most banks have a higher credit deposit ratio, meaning they have more loans relative to the deposits. Deposit growth needs to pick up in banks in order to avoid liquidity issues. Hence, banks may try to attract more deposits by keeping the rates steady or even increasing based on different tenors. Hence, people still have time to park their money in some decent FDs
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Macroeconomic variables are not that simple to decode. There are 2 major divisions
- Fiscal policy
- Monetary Policy
When the Govt. is on a spending spree ie higher capital expenditure, the monetary tightening will not help control inflation. After this budget, we will get a fair idea of the fiscal policy.
All of them want a higher GDP, but higher national income and higher interest rates are normally mutually exclusive - meaning we cannot have both of them going in the same direction. When that happens, it is normally due to shifts.
To answer your question specifically - to lower the interest rates, either the
- inflation has to stay in the band. Ideally, it has to deflate for pre-covid prices (but I don’t think RBI has this agenda).
- the national income has to fall (recession) so that the supply of money can be increased to stimulate growth.
It is anticipated to begin after October.
Whereas ECB has already started with a 25 bps rate cut.