With the Reserve Bank of India’s (RBI’s) bi-monthly monetary policy committee (MPC) meeting underway, there is high speculation that the central bank may announce a rate cut, which has remained unchanged since February 2023.
Ahead of the RBI’s MPC meeting, there are speculations that the central bank may announce a rate cut. Should you lock your funds in fixed-income instruments now?
With the Reserve Bank of India’s (RBI’s) bi-monthly monetary policy committee (MPC) meeting underway, there is high speculation that the central bank may announce a rate cut, which has remained unchanged since February 2023.
Experts are predicting a 25 basis points (0.25 per cent) rate cut in this MPC meeting. The repo rate was cut last in May 2020. Later, between May 2022 and February 2023, it was hiked by 250 basis points.
When speculations of a rate cut arise, investors typically consider if it is the right time to lock in funds in fixed-income instruments. While a rate cut is beneficial for borrowers, for depositors, it has a reverse effect.
Senior citizens, who particularly like investing in bank fixed deposits (FDs), also wonder whether they should deposit in long-term FDs now or should they continue with any random tenure providing higher interest.
Rajeev Radhakrishnan, chief investment officer (CIO) – fixed income, SBI Mutual Fund, opines that it would be hasty to build in rate cut expectation in February 2025, ‘as the broader growth inflation mix does not unambiguously call for the same’.
He says: “Given that liquidity actions have a far direct and sustained impact, which has clearly been done, there is clearly a merit in pushing back rate cuts possibly until there is more clarity on the external front as well as the evolution of domestic growth inflation mix along with liquidity conditions over the coming quarters. The April review possibly remains a better bet for a rate cut possibility. It is also probable that the requirement of effective transmission warrants a front loading of the cut as and when the space opens, rather than moving incrementally with 25 bps.”
Ajit Banerjee, president and CIO, Shriram Life Insurance says: “Central banks are turning dovish after easing of the decadal high inflation prevailing across the globe. However, given the variation in inflation trajectories across the major economies, the actions and the quantum of easing and timing may not be uniform.”
“The banking system (in India) is continuing to face a severe liquidity crunch still. RBI cut the CRR by 50 bps in the December policy, which infused Rs 1.26 trillion into the banking system. This provided partial respite, but wasn’t sufficient enough, and therefore, RBI had to make further liquidity enhancement measures on January 27, 2025. This multiple liquidity injection announcement is also being seen as a precursor for a rate cutting cycle which is scheduled to commence with a 25-bps rate cut in February 2025.”
Shriram Ramanathan, CIO - Fixed Income, HSBC Mutual Fund, stated, “While growth outlook has clearly moderated versus earlier expectations, recent data indicate that inflation is cooling off sharply, driven by the sharp moderation of food inflation over December and January. This, in our view, should enable the RBI to respond with more urgency to curb downside growth risks by acting quickly - both on liquidity infusion into the banking system as well as policy rate cuts. We expect the MPC to cut rates (in total) by 50bps over the February and April policies”.
On the concern about market movement if a rate cut happens, Suresh Darak, founder, Bondbazaar, says, “We expect the RBI to cut the benchmark rate by 25 bps in the upcoming policy meeting, given the government’s commitment to fiscal prudence. However, this move is largely priced in, so we don’t anticipate significant market movement. The real focus will be on the RBI’s future guidance, particularly its strategy for managing liquidity amidst currency depreciation. The RBI’s outlook on liquidity and currency will be crucial in shaping market sentiment.”
At this point, the rate cut is being speculated, but even if it happens, the rate cut transmission to deposits and lending will take some time.
Says Radhakrishnan: “Market-based instruments, such as treasury bills typically reflect the pass-through immediately, while the deposit and lending rates correct with a lag that is variable. The same is also a function on banking sector demand for funds and the broader economic environment.”
Ramanathan quips, “Monetary policy transmission normally acts with a 2-3 quarter lag”.
Yet, one needs to be vigilant and invest before the transition happens.
Radhakrishnan explains, “There is visibility on realising real returns, given the higher yields available on AAA as well as other high-grade fixed income products that take a moderate credit risk. The possibility of easing liquidity and some rate cuts down the line should enable some mark-to-market gains. Overall valuation and diversification arguments for fixed income products are very compelling.”
Darak adds: “Considering both domestic and international factors, customers should explore locking in some part of their portfolio into the current fixed income rates before there are major movements.”
So, if fixed income instrument are your choice for diversification or to avoid volatility, keep an eye on rate related announcement on February 7, 2025.