The RBI announced a reduction in the repo rate to 6.25% on Friday, marking the first cut in almost five years. This rate represents the interest at which commercial banks can borrow from the central bank. The 25 bps cut is expected to prompt banks to decrease their lending rates, making loans more affordable for borrowers. However, this move may also result in a decrease in fixed deposit interest rates, impacting investors who depend on them for returns.
Investors should note the recent 25 basis points rate cut by the RBI signals a departure from the high-interest rate environment of the past four years. This period saw continuous rate hikes that led to increased loan rates while also making fixed deposits (FDs) more appealing to savers. In order to attract deposits and maintain liquidity amidst rising borrowing costs, banks had to offer higher FD rates.
However, following the latest rate cut, banks may now begin to reduce FD interest rates in response to lower lending rates. This could have an impact on investors, particularly retirees and conservative savers, who have been enjoying strong returns on their deposits.
For individuals investing in fixed deposits, particularly senior citizens dependent on interest income, declining deposit rates lead to decreased returns. If banks lower rates in the near future, new fixed deposit investors will earn less compared to those who secured accounts at previously higher rates.
Mahendra Kumar Jajoo, CIO - Fixed Income, Mirae Asset Investment Managers (India), said, “Policy is a positive response to fiscal consolidation and may signal more rate cuts ahead. Bond yields are expected to ease further.”
Investors who depend on Fixed Deposits (FDs) for income may have to explore other investment avenues to sustain their yields.
"Some would say that this rate cut by MPC/RBI is premature and that inflation is not under control yet. Monetary easing is the need of the hour, from the perspective of trying to revive the economy. For monetary easing to be effective, more rate cuts are needed for a long period of time. Liquidity needs to be easy as well. I feel that the inflation projection of 4.2% for FY26 is a tad optimistic. I expect further rate cuts of 50 bps during the year. It is a bold move by RBI. The short-term funds are likely to perform better. The long end of the curve will move lower once the inflation battle is won, which is some time away. There is pressure on the currency as well, which will make interest rates volatile, though within a range," said Sandeep Bagla, CEO, TRUST Mutual Fund.
Adhil Shetty, CEO of BankBazaar, said that investors in Fixed Deposits (FDs) may need to reconsider their investment strategy as interest rates are expected to decrease.
Here are some quick options:
Secure Current Rates: Individuals looking to start a new FD should act promptly to lock in the current interest rates before any potential decreases by banks.
Debt MFs: Consider exploring alternative investments such as debt mutual funds, corporate bonds, or equity-linked savings schemes (ELSS) as fixed deposit (FD) returns decrease, depending on your risk appetite.
Ladder FDs: Implement FD laddering by splitting investments into multiple FDs with varying tenures to mitigate the effects of declining interest rates.
Reinvesting in other tools: Review your existing FDs to see if premature withdrawals are allowed. If penalties are low, consider reinvesting in higher-yielding instruments as a possible option.