Tag: interest rates

US Federal Reserve holds steady on interest rates, signals potential future cuts

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The US Federal Reserve held interest rates steady on Wednesday and signaled it is still leaning towards eventual reductions in borrowing costs, but put a red flag on recent disappointing inflation readings and suggested a possible stall in the movement towards more balance in the economy.

The Fed’s latest policy statement, issued at the end of a two-day meeting, kept key elements of its economic assessment and policy guidance intact, noting that “inflation has eased” over the past year, and framing its discussion of interest rates around the conditions under which borrowing costs can be lowered.

US stocks pared losses following the release of the policy statement while the US dollar fell against a basket of currencies. US Treasury yields fell.

Investors in contracts tied to the Fed’s policy rate continued to see the US central bank beginning to cut rates in November and added to bets that it will deliver at least one reduction in borrowing costs this year.

“The (Federal Open Market Committee) does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2%,” the Fed repeated in a unanimously-approved statement that still indicated the next move on rates will be down.

That continues to leave the timing of any rate cut in doubt, and Fed officials made emphatic their concern that the first months of 2024 have done little to build the confidence they seek in falling inflation.

“In recent months, there has been a lack of further progress towards the Committee’s 2% inflation objective,” the Fed said in its statement. Where the prior statement in March suggested an improving dynamic, saying that the risks to the economy “are moving into better balance,” the new statement hinted that the process may have stalled with its assessment that risks “have moved toward better balance over the past year.”

“The Committee marked to market on inflation by noting that Q1 data didn’t show the additional progress that they hoped to see, but the statement also suggested that they would not view further labor market strength through an inflationary lens,” said Omair Sharif, president of Inflation Insights.

BALANCE SHEET

The US central bank also announced it will scale back the pace at which it is shrinking its balance sheet starting on June 1, allowing only $25 billion in Treasury bonds to run off each month versus the current $60 billion. Mortgage-backed securities will continue to run off by up to $35 billion monthly.

The step is meant to ensure the financial system does not run short of reserves as happened in 2019 during the Fed’s last round of “quantitative tightening.”

While the move could loosen financial conditions at the margin at a time when the US central bank is trying to keep pressure on the economy, policymakers insist their balance sheet and interest rate tools serve different ends.

The benchmark policy rate has been held in the current 5.25%-5.50% range since July. Rate cuts had been anticipated as early as March of this year, but have been pushed back as incoming inflation data showed that progress towards the 2% target had stalled. The personal consumption expenditures price index, which is the Fed’s preferred inflation gauge, increased 2.7% in March on a year-over-year basis.

“Inflation remains elevated,” the Fed’s policy statement said, repeating a phrase that many analysts feel will likely need to be removed as a precursor to an initial rate reduction.

Fed Chair Jerome Powell will hold a press conference at 2:30 p.m. (1830 GMT) to elaborate on the outcome of the policy meeting.

The statement maintained its overall assessment of economic growth, saying that the economy “continued to expand at a solid pace. Job gains have remained strong and the unemployment rate has remained low.”

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These two lenders have hiked fixed deposit rates in April: Should you invest in FDs now?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Two non-banking financial companies (NBFCs) have recently raised their fixed deposit (FD) interest rates. While Shriram Finance has hiked rates by 0.05% to 0.20% on various maturity tenures, Bajaj Finance has increased FD rates for senior citizens by up to 60 basis points in the 25-to-35-month tenure and 40 basis points in the 18-to-24-month tenure.

In the case of Shriram Finance, the revised rates have come into effect from April 9, 2024.

On the other hand, Bajaj Finance’s latest FD rates are effective from April 3, 2024.

Let’s delve into the details of these rate revisions and whether now is the opportune time to invest in FDs:

Shriram Finance

For non-cumulative fixed deposits, Shriram Finance currently offers interest rates ranging from 7.85% to 8.80% per annum for terms spanning 12 to 60 months.

A non-cumulative fixed deposit (FD) is a type of FD where the interest earned on the principal amount is paid out at regular intervals, such as monthly, quarterly, half-yearly, or annually, depending on the terms of the FD.

Here are the interest rates offered by Shriram Finance on non-cumulative fixed deposits:

(Source: Shriram Finance)

On the other hand, the effective yield on cumulative fixed deposits is between 7.85% to 10.50% per annum for the same tenure range.

In cumulative FDs, the interest is compounded and paid out along with the principal amount at maturity.

Here are the interest rates offered by Shriram Finance on cumulative fixed deposits:

(Source: Shriram Finance)

Bajaj Finance

Here are the latest FD rates offered by Bajaj Finance on deposits up to ₹5 crore:

Special period – Valid for deposits up to ₹5 crore

Regular period – Valid for deposits up to ₹5 crore

In light of these developments, the question arises: Is now the right time to invest in FDs?

It must be noted that the Reserve Bank of India (RBI) has left the repo rate unchanged for the seventh consecutive time, signalling stability in interest rates.

Adhil Shetty, CEO of Bankbazaar.com, said stable interest rates bode well for FD investors, especially those seeking predictable income streams and capital preservation.

While the repo rate pause implies stability for FD rates, some banks and NBFCs continue to raise rates, leveraging the transmission window left by previous hikes.

Therefore, investors may find themselves in a favourable position to secure attractive returns on their investments.

However, one widely accepted principle is to limit FD investments to the extent covered by Deposit Insurance and Credit Guarantee Corporation (DICGC) in India.

This insurance typically covers deposits up to ₹5 lakh, safeguarding investors’ funds in the event of a bank or NBFC failure.

By adhering to this principle, investors mitigate the risk associated with individual lenders and ensure that their savings remain protected.

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This lender is offering up to 9.25% interest rate on fixed deposits: Are small finance bank FDs safe?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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North East Small Finance Bank (NESFB) has announced the launch of its enhanced fixed deposit (FD) schemes. Currently, the lender is offering up to 8.50% rate for the general public and 9.25% for senior citizens. It must be noted that senior citizens are generally offered higher rates on FDs by any lender.

Here are the latest FD rates offered by North East Small Finance Bank:

(Source: North East Small Finance Bank)

Considering other small finance banks as well, the prevailing interest rates for higher fixed deposits range from 8% to 9.5%

Among them, Unity Small Finance Bank stands out with a 9.50% interest rate for a 1001-day tenure. Fincare Small Finance Bank closely follows at 9.21% for a 750-day FD.

Jana Small Finance Bank also offer rates at 9.00% for 365 days.

Generally, fixed deposits (FDs) offered by small finance banks are considered safe, but like any financial product, they come with their own set of risks.

Here are some points to consider regarding the safety of FDs offered by small finance banks:

Regulation and compliance

Small finance banks are regulated by the Reserve Bank of India (RBI), ensuring they adhere to certain regulatory standards and guidelines.

This oversight helps to maintain the stability and integrity of these banks, contributing to the safety of their FD offerings.

Deposit insurance

FDs offered by small finance banks are typically covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to a certain limit.

This insurance provides an additional layer of security for depositors, safeguarding their investments in case of bank failure.

Credit ratings

Before investing in an FD offered by a small finance bank, it’s advisable to check the bank’s credit ratings.

Credit rating agencies assess the financial strength and stability of banks, providing insight into their ability to honour their financial obligations, including FD repayments.

A higher credit rating indicates greater reliability and stability.

Market reputation

Investors should consider the reputation and track record of the small finance bank.

Banks with a solid reputation for reliability, transparency, and customer service are generally safer options for FD investments.

Interest rates vs risk

Higher interest rates offered by small finance banks may sometimes indicate higher risks associated with their FDs.

While attractive interest rates can enhance returns, depositors should carefully evaluate the trade-off between returns and risk, ensuring that they are comfortable with the level of risk involved.

Diversification

It’s advisable not to put all the savings into FDs from a single small finance bank.

Diversifying investments across multiple banks can mitigate the risk of loss in case of any adverse events affecting a particular bank.

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Janet Yellen says rates ‘unlikely’ to return to pre-Covid levels

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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US Treasury Secretary Janet Yellen said it’s “unlikely” that market interest rates will return to levels that prevailed before the Covid-19 pandemic triggered a wave of inflation and higher yields.

Asked why White House projections released Monday showed markedly higher expectations for interest rates in coming years compared with projections a year ago, Yellen said the new numbers were in line with private sector forecasts.

“I think it reflects current market realities and the forecasts that we’re seeing in the private sector — that it seems unlikely that yields are going to go back to being as low as they were before the pandemic,” Yellen told reporters Wednesday in Elizabethtown, Kentucky.

The yield on 10-year US Treasury notes averaged 2.39% in the decade through 2019 — low by historical standards. It spiked above 5% last October after the Federal Reserve raised rates aggressively to combat inflation, and now sits just below 4.2%.

A considerable debate has emerged among economists over whether, in the long run, rates would return to pre-pandemic levels or settle higher.

The Treasury chief said “it’s important that the assumptions that we built into the budget are reasonable and consistent with thinking of the broad range of forecasters.”

Yellen has hinted in recent weeks that her own views on the issue had shifted. In January 2023, she indicated it was more likely that low rates would return. But this January she said “the jury’s still out” on the question.

The new White House projections were part of President Joe Biden’s $7.3 trillion fiscal 2025 budget proposal. They assume now that the average rates on three-month and 10-year US Treasury bills and notes will be markedly higher over the next three years than they anticipated a year ago.

Higher Forecast

The three-month rate, for example, will average 5.1% this year, up from the 3.8% projected last March, White House officials said. The 10-year yield projection rose to 4.4% from 3.6%.

The latter projection might have been even higher but for the intervention of Lael Brainard, director of the National Economic Council, according to people familiar with the matter prior to the release.

Higher rates on the growing burden of US debt add significantly to the overall deficit and debt figures. Under the current assumptions, the White House expects the US to spend about $890 billion, or 3.1% of gross domestic product, on net interest expenses this year.

Yellen spoke as she traveled to Kentucky to tout the Biden administration’s economic policy record, part of her stepped up efforts this year to address domestic audiences in the run-up to the 2024 elections.

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Interest rates on small savings schemes remain unchanged for Q1 FY25

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The government on Friday, March 8, has kept the current interest rates unchanged on various small savings scheme for the initial quarter of the upcoming fiscal year, beginning April 1, 2024. This decision was confirmed through a notification released by the finance ministry on Friday.

“The rates of interest on various small savings schemes for the first quarter of FY 2024-25, starting from April 1, 2024, and ending on June 30, 2024, shall remain unchanged from those notified for the fourth quarter (January 1, 2024, to March 31, 2024) of FY 2023-24,” the notification said. The deposit under the Sukanya Samriddhi scheme will attract an interest rate of 8.2%, while the rate on a three-year term deposit remains at 7.1%.

The interest rates for popular PPF and savings deposits too have been retained at 7.1% and 4%, respectively. The interest rate on the Kisan Vikas Patra will be 7.5%, and the investments will mature in 115 months.

The interest rate on the National Savings Certificate (NSC) will remain at 7.7 per cent for the April 1-June 30, 2024, period. Like the current quarter, the interest rate for the Monthly Income Scheme will earn 7.4% for investors.

The government notifies the interest rates on small savings schemes, majorly operated by post offices, every quarter. The Reserve Bank, since May 2022, has raised the benchmark lending rate by 2.5% to 6.5%, prompting banks to raise interest rates on deposits as well.

However, the RBI has maintained the status quo on policy rate in the last five consecutive Monetary Policy Committee meetings since February this year.

(With PTI inputs)

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Aditya Birla Sun Life AMC’s CEO foresees India as the prime destination for global investment

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A Balasubramanian, MD & CEO of Aditya Birla Sun Life AMC, expressed optimism about India’s economic performance, emphasising the solid foundation built for the future.

He anticipates a favourable momentum for India as global interest rates decrease, leading to increased flows into emerging markets, with India poised to be the primary beneficiary.

“India so far has not only been one of the best-performing economies in the world, but the way we have built the base for the future, we will continue to see the momentum more in favour of India. As interest rates start coming down globally, the emerging market flows will go up and therefore India will become the largest recipient of those flows,” Balasubramanian said in an interview with CNBC-TV18.

Foreign investment in Indian government bonds experienced a notable surge in the final quarter of 2023, reaching a six-year high, driven in part by JPMorgan’s decision to include the debt in its indexes.

During October–December, overseas investors purchased government bonds totalling ₹350 billion ($4.2 billion), contributing to the highest annual total since 2017, as indicated by clearing house data.

Balasubramanian also shared insights on the interest rate scenarios, predicting a potential reduction in rates by the United States in the latter half of the current calendar year. He believes the US will experience a slowdown in job rates and inflation, leading to the initiation of a rate-cut cycle in the same period. For India, he anticipates flat interest rates in the current year, with any rate cuts likely to occur in 2025.

The Reserve Bank of India at its December 8, 2023, policy meeting, left the lending rate unchanged at 6.5%. The Monetary Policy Committee aimed to focus on the “withdrawal of accommodation,” and the RBI expected inflation to persist above its comfort level through the financial year ending March 2024.

Balasubramanian also highlighted the growing prominence of the mutual funds industry among investors. He emphasised the increasing popularity of systematic investment plans (SIPs) as the preferred method for saving money in mutual funds. Predicting a continued rise in SIP numbers, he expected incremental considerations to be directed towards SIPs.

In December 2023, equity mutual funds witnessed their 34th consecutive month of inflows, reaching ₹16,997 crore, reflecting sustained investor interest in equities despite market fluctuations, according to data from the Association of Mutual Funds in India (AMFI).

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India economic outlook 2024: Experts weigh in on growth, interest rates, and rupee

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Indian economy grew a solid 6.5% in 2023, outpacing most major economies. However, the road ahead may be bumpy given the weak global economic outlook, according to economists who shared insights with CNBC-TV18 on their estimates of GDP, interest rates and the rupee.

Samiran Chakraborty, Chief India Economist at Citi, predicts a modest 50 basis points (bps) drop in GDP growth rate for India in the fiscal year 2025. Citi’s global economists forecast a drop in global growth from 2.7% in 2023 to 1.9% in 2024, affecting India’s growth rate.

Santanu Sengupta, Chief India Economist at Goldman Sachs, attributed the lower growth forecast of 6.5% for fiscal year 2025 to a fiscal drag. He noted optimism in US growth but emphasised the impact of fiscal policies on India’s economic prospects.

Sakshi Gupta, Deputy Vice President and Sr. Economist at HDFC Bank, echoed these sentiments, projecting a growth rate of 6.3% for the upcoming year. Gupta anticipated a slowdown due to the global economic downturn and foresees a fiscal drag affecting India’s economic performance.

Gupta anticipates a tight monetary policy for at least the first half of the year. Even if rate cuts are implemented in the latter part of the year, they are expected to be gradual. The tight monetary stance, coupled with global economic challenges, is likely to exert pressure on India’s growth prospects.

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Neeraj Gambhir, Group Executive and Head-Treasury, Markets, and Wholesale Banking Products at Axis Bank, foresees a range-bound bond market with stable rates. Despite potential fluctuations in deposit rates, a generally stable rate regime is expected.

Sakshi Gupta further suggested that once the election uncertainty subsides, the second half of the fiscal year might witness more broad-based signs of private capex revival. This indicates a potential turnaround in economic sentiment and investment patterns.

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For more, watch the accompanying video

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US Fed set to raise rates to 22-year high and decide if it’s done hiking

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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US Federal Reserve policymakers are poised to hike interest rates to the highest level in 22 years, while retaining a tightening bias that signals the possibility of an additional move later in the year.

The Federal Open Market Committee is expected to raise rates a quarter point to the 5.25 percent to 5.5 percent range, an 11th increase since early 2022. It will release the decision at 2pm in Washington. Chair Jerome Powell will hold a press conference 30 minutes later.

Investors will be listening for clues from Powell about how determined the central bank is to raise again in 2023. With inflation pressures diminishing last month, investors see Wednesday’s decision as almost certain but expect no additional increases, while the FOMC in June penciled in a final hike later in the year.

“They will be leaving all options open,” said Veronica Clark, an economist at Citigroup Inc. “They will certainly stay cautious after only a couple of months of softer inflation data which is not enough for them to be convinced the job is done.”

A July hike would follow a pause in June that was intended to slow the pace of increases as they approach a level believed to be restrictive enough to return inflation to their 2 percent target over time. Still, Powell and other policymakers will want to sound resolute to avoid recurrences of surging prices.

“They want to avoid the mistakes of the 1970s and ’80s when they took their foot off the brake prematurely,” said Kathy Bostjancic, chief economist at Nationwide Life Insurance Co.

“With recent economic data seemingly bolstering the chances of a soft landing, the FOMC is unlikely to rock the boat. Powell will adopt a wait-and-see approach, signaling a skip at the September meeting – a skip that we believe will turn into an extended pause,” said Anna Wong, chief US economist

FOMC Statement

The statement is likely to leave in place its guidance that hints at possible “additional policy firming.” It’s also likely to continue to describe economic growth as “modest,” despite mostly upbeat data ahead of Thursday’s gross domestic product release. The committee could debate whether to acknowledge recent inflation progress or simply say it remains elevated.

Following the failure of three US banks, the committee has included a statement of confidence in the banking industry, describing it as “sound and resilient.” With stresses having diminished, the committee could debate dropping that statement as no longer necessary, say Deutsche Bank AG economists.

Dissents

Powell has maintained a strong consensus on the committee, with the last dissent in June 2022. That record of no dissents is very likely to continue.

Press Conference

Powell will be asked in the press briefing whether the FOMC’s forecast in the June “dot plot” in the Summary of Economic Projections calling for another hike is still intact, in light of better-than-expected inflation news in June.

“The question after the meeting is, do they go again?” said Vincent Reinhart, chief economist at Dreyfus and Mellon who previously spent more than two decades working at the Fed. “You listen at this meeting to see how much Powell at the press conference embraces the Summary of Economic Projections or puts some distance in.”

Powell will also be asked his assessment of the latest consumer price reading, which showed the annual rate of inflation dropping to 3%. If he is leaning toward another hike, he might want to downplay the importance of a favorable report. The Fed is focused on a separate measure of inflation, based on personal consumption.

While Powell has said he sees a narrow path for a soft landing, the Fed staff has predicted a US recession, according to minutes of recent FOMC meetings. With recent signs of a resilient economy, the chair is likely to be pressed on his view and whether the staff is still in the recession camp.

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‘Almost all’ officials agreed to skip June hike: US Fed minutes

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A united US Federal Reserve agreed to hold interest rates steady at the June meeting as a way to buy time and assess whether further rate hikes would be needed, even as the vast bulk expected they would eventually need to tighten policy further, according to meeting minutes released on Wednesday.

While “some participants” wanted to move ahead with a rate hike in June because progress in cooling inflation had been slow, “almost all participants judged it appropriate or acceptable to maintain” the federal funds rate at the existing 5 percent to 5.25 percent, the minutes said.

“Most of those participants observed that leaving the target range unchanged at this meeting would allow them more time to assess the economy’s progress,” toward returning inflation to 2 percent from its current level more than twice that.

The minutes added detail to the policy statement and economic projections issued after the June 13-14 session, when the Fed ended its 10-meeting streak of rate hikes with a decision to hold the benchmark federal funds rate steady.

Markets were little changed after the minutes, with traders in futures tied to the Fed policy rate continuing to price in a rate hike in July and about a one-in-three chance of another increase before the end of the year.

While Fed staff still saw a “mild recession” beginning later this year, they now viewed avoiding a downturn as only a little less likely than their baseline. Meanwhile policymakers wrestled with data showing a continued tight job market and only modest improvements in inflation.

Officials also tried to reconcile headline numbers showing continued economic strength with evidence of possible weakness – of household employment figures that pointed to a weaker labor market than the payroll numbers indicated, or national income data that seemed weaker than the more prominent readings of gross domestic product.

The logic of waiting, whether it amounted to a “skip” of one meeting or turned into a longer pause, reflected what officials said was still deep uncertainty around whether the Fed had already raised rates enough to tame inflation — and only needed to wait for the impact of tighter policy to be realized — or still needed to lean on the economy harder.

“Most participants observed that uncertainty about the outlook for the economy and inflation remained elevated and that additional information would be valuable for considering the appropriate stance of monetary policy,” the minutes said.

The projections issued after the June meeting showed 16 of 18 officials still expected the policy interest rate would need to rise at least another quarter of a percentage point by the end of the year.

In that context, Fed Chair Jerome Powell at a press conference after the June meeting said the decision marked a switch in strategy, with the central bank focused more on just how much additional policy tightening might be needed and less on maintaining a steady pace of increases.

“Stretching out into a more moderate pace is appropriate to allow you to make that judgment” over time, Powell said.

Investors in contracts tied to the overnight federal funds rate feel the Fed is highly likely to raise the benchmark rate by a quarter point, to a range between 5.25 percent and 5.5 percent, at its July 25-26 meeting.

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These two fixed deposit strategies may help you maximise returns

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI), in its last policy, hit the pause button on repo rate hikes. However, the recent overall rise gives fixed deposit (FD) investors a favourable scenario. They are anticipating the benefit of all previous big repo rate hikes to be passed on to the bank FDs. While nothing certain can be said on that, two strategies that can help investors now are FD laddering and the barbell route.

Fixed deposit laddering is a process of spreading investment in FDs over multiple maturity tenures or maturity buckets, whereby investors hold the chance to earn a higher return and even address the liquidity needs. On the other hand, barbell allows investors to distribute their portfolio between short-term and long-term FDs, without having any exposure to intermediate term FDs.

Understanding FD laddering and the use case

If one has to invest a lump sum of Rs 10 lakh in a five-year FD, he can divide it into smaller parts with the laddering technique. This can be of Rs 2 lakh each across maturities ranging from 1-5 years. They can choose to invest smaller sums in shorter duration FDs and incrementally increase the quantum of investment into longer tenure FDs.

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With this, they will have FDs maturing each year, which would provide the liquidity buffer. In case of emergency, they can liquidate the smallest tenure FD, thus minimising the amount lost in the form of penalties.

FDs are viable for short-term capital protection, such as in case of parking emergency funds. As interest rates are on an upward track, it is best to ladder investments and invest them for shorter periods so that investors can reinvest them on maturity to get higher returns, experts say.

By choosing FD laddering, an investor can make the most of fluctuating rates of interest, instead of locking funds at a rate which turns out to be lower in the long run.

Laddering will also take care of liquidity issues and provide investors with regular returns periodically. Investors who mainly depend on FDs, especially senior citizens, can use it effectively to enhance their return.

Understanding barbell strategy and when it is useful

According to Naveen Kukreja, Co-Founder and CEO at Paisabazaar, the barbell strategy is usually used in bond investing.

“This is useful during rising rate interest rate regimes as the maturity of short-term bonds would allow the investors to purchase long-term bonds with higher yields. Likewise, this should be used during rising interest regimes in fixed deposits too. However, many bond market indicators are showing signs of the interest rates peaking. Using the barbell strategy now can be counter-productive, if interest rates stay flat or start to fall in the near future,” Kukreja told CNBC-TV18.com.

Thus, fixed depositors should use the barbell strategy only if they have strong convictions of interest rates rising in the near future. Else, Kukreja thinks they should select FD tenures based on their investment horizon and the highest slab rates offered by various banks.

Currently, several scheduled banks are offering FD yields of 8 percent and above. Thus, depositors should use their existing surpluses to book such high-yield FDs, especially if those high yields are offered for longer tenures. Here’s a look at current FD rates of key banks:

(Source: Bankbazaar)

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow