The Reserve Bank of India (RBI) has cut the repo rate by 25 basis points to 6.25%—the first reduction in nearly five years. While this move benefits borrowers, it also signals a decline in fixed deposit (FD) interest rates, posing a challenge for investors, especially senior citizens who rely on FD income.
With banks expected to lower FD rates in response to cheaper borrowing costs, returns on deposits could shrink in the coming months.
Senior citizen FD rates, currently ranging between 7.30% and 8.8%, are likely to drop gradually. For instance, a ₹10 lakh FD earning 7.5% interest annually generates ₹75,000 in returns. A 0.25% rate cut would reduce this by ₹2,500 per year. Some banks, including Union Bank and Axis Bank, had recently raised FD rates, but this trend may reverse soon, leaving a short window for investors to lock in current rates.
For FD investors, this change presents both risks and opportunities. Lower interest rates mean reduced returns, but they also encourage economic growth and liquidity in the banking sector. To mitigate the impact, investors should act strategically, say experts. Short-term FDs with tenures of one to three years can help secure prevailing rates before they drop further. Small finance banks such as Ujjivan and Shivalik SFB are currently offering up to 9.5% for senior citizens, but deposits should be kept within the ₹5 lakh limit covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
Comparing rates across institutions is also crucial. Public sector banks like Central Bank of India offer 7.50% for 1,111 days, while Bank of Maharashtra provides 7.45% for 366 days. Private players such as Bajaj Finance and Shriram Finance currently offer 8.4% for 42 months and 8.8% for 60 months, respectively. Diversifying deposits across banks can help maximize insurance coverage while combining FDs with debt mutual funds or senior citizen savings schemes (SCSS) can offer better overall returns.
Adhil Shetty of BankBazaar advises investors to act swiftly. “While the repo rate cut is good news for borrowers, fixed deposit (FD) investors may need to reassess their strategies. With interest rates likely to decline further, FD returns could shrink in the coming months.” He suggests locking in current rates before banks revise them downward, exploring alternative investments like debt funds or corporate bonds, and adopting an FD laddering strategy by spreading deposits across different tenures to reinvest at potentially higher rates later.
For those with existing FDs, reviewing premature withdrawal penalties is advisable. Some banks, such as Ujjivan SFB, waive penalties after six months, making reinvestment in higher-yielding instruments a viable option. Meanwhile, inflation remains a concern, with retail inflation currently at 4.2%. Ensuring that FD returns outpace inflation is critical to preserving purchasing power.
The recent Union Budget 2025 further boosts savings potential for the middle class, offering tax exemptions on income up to ₹12 lakh under the new regime. This, combined with RBI’s rate cut, provides an opportunity for individuals to reallocate their savings and investments strategically.