As inflationary concerns resurface amid rising global commodity prices and geopolitical tensions, many savers are wondering whether a potential rate hike by the Reserve Bank of India (RBI) could lead to better returns on fixed deposits (FDs). Experts, however, caution that the answer is more nuanced than it appears.

With the next monetary policy committee (MPC) review nearing, many fixed deposit investors are facing a familiar question. Should they lock in current FD rates now or wait in anticipation of a possible rate hike later. For now, analysts believe FD rates remain reasonably attractive despite some moderation in recent months. Given the uncertainty surrounding the future interest rate cycle, locking into existing rates may prove to be a practical strategy for conservative investors seeking stability and predictable returns. 

Will a rate hike really help FD investors? 

According to Ranen Banerjee, Partner and Leader, Economic Advisory, PwC India, any potential RBI rate hike would likely come only if retail inflation moves dangerously close to the central bank’s upper tolerance limit of 6%. 

“That would imply inflation has already risen by around 2 to 2.5 percentage points from current levels,” Banerjee tells Fortune India. “In such a scenario, even if FD rates eventually move higher, real returns for investors would remain significantly lower because inflation would erode purchasing power.” 

He also notes that the transmission of RBI policy rate hikes to deposit rates is not immediate. Banks typically raise lending rates faster than deposit rates, meaning borrowers feel the impact before savers benefit. 

“The EMIs on mortgages and other loans tend to rise faster because loan rate transmission is quicker than deposit rate transmission,” Banerjee says. “Overall, a high-interest-rate environment is generally not favourable for household balance sheets.” 

Why RBI may stay on pause 

Despite wholesale price inflation (WPI) remaining elevated above 8%, Banerjee believes the RBI’s Monetary Policy Committee (MPC) is unlikely to alter rates immediately. 

The central bank’s primary focus remains consumer price inflation (CPI), which is still below 4% and comfortably within the RBI’s target range. “The inflationary pressures currently are largely supply-side driven,” he says. “There are also concerns around the sustainability of demand, which could limit the ability of producers to fully pass on higher costs to consumers.” 

With more than a two-percentage-point cushion before retail inflation breaches the RBI’s upper threshold of 6%, Banerjee expects the central bank to continue with its pause in the upcoming policy meeting. 

Short-term FDs may offer flexibility 

Vivek Iyer, Partner and Financial Services Risk Leader, Grant Thornton Bharat, says investment decisions should ultimately align with an investor’s risk appetite and return expectations. 

“Fixed deposits are naturally suited for low-risk investors,” Iyer says. “But the current environment is complex because while global growth remains weak, the domestic economy continues to show resilience.”  

Given the uncertainty around inflation and interest rates, Iyer believes short-term FDs could be a more sensible option for many investors. “Short-duration deposits give investors the flexibility to reassess their positions periodically based on the RBI’s policy decisions,” he says. 

For FD investors, the message from experts is clear. Chasing higher nominal rates may not necessarily translate into better real returns. In an uncertain inflation environment, balancing safety, liquidity, and purchasing power remains more important than trying to time the RBI’s next move. 

Inflation risks still persist 

Dharmakirti Joshi, Chief Economist at Crisil Ltd, also expects the RBI to keep the repo rate and policy stance unchanged in the upcoming monetary policy review scheduled between June 3 and June 5. 

However, he cautions that inflation risks remain tilted to the upside, particularly if geopolitical tensions in West Asia intensify further. “Headline CPI and core inflation remain within the comfort zone for now,” Joshi says. “But WPI inflation has risen sharply, reflecting higher input costs that could gradually transmit into consumer prices.” 

According to Joshi, the RBI is likely to continue with a wait-and-watch approach until it gains greater clarity on whether the current inflationary pressures are temporary or persistent.