The Reserve Bank of India (RBI) has delivered another blow to fixed deposit investors, paving the way for a fresh round of interest rate reductions on savings instruments. In its latest monetary policy announcement, the central bank cut the key repo rate by 25 basis points to 5.25%, marking the fourth such reduction this year.
A Cumulative Impact on Savings
This latest cut brings the total reduction for the year to a significant 125 basis points, down from the 6.5% level at the start of 2024. The RBI had previously lowered the benchmark rate three times: by 25 basis points each in February and April, followed by a sharper 50-basis point cut in June. Policy rates were left unchanged during the August and October reviews.
While banks and small finance banks had already begun trimming FD rates following the earlier cuts, the transmission of the first three reductions was still ongoing. Financial experts now consider another round of downward revisions for new fixed deposits as almost inevitable following this fourth rate cut. Existing deposits will continue to earn their contracted rate until maturity, but new investments will likely see lower returns.
Why the Cut and What's Next?
The RBI's decision was driven by two primary factors: a notable decline in retail inflation and a significant improvement in GDP growth. This move comes even as interest rates on post office small savings schemes have remained static for over a year.
The December meeting was the final Monetary Policy Committee (MPC) review for this calendar year. Only one more policy review remains in the current financial year, scheduled for February 2026. While further easing in the next two to three quarters cannot be ruled out, analysts believe an immediate follow-up cut in February is unlikely. It is worth noting that despite the cumulative 125 bps reduction, the repo rate remains above the historic lows witnessed during the COVID-19 pandemic.
Strategies for FD Investors to Maximise Returns
Investors still have a window of opportunity to act. Banks typically take time to pass on rate cuts, and the reduction in deposit rates may not be directly proportional to the 25 bps repo rate cut. Some institutions, particularly small finance banks, continue to offer rates of 7.5% or higher on long-term FDs, while several major banks provide around 7% for longer tenures.
Act Quickly to Lock in Rates: With the direction clear, investors keen on preserving returns should move swiftly to book deposits at the currently available higher rates before lenders adjust their rate sheets.
Prioritise Safety and Insurance Cover: When opting for banks offering higher rates, which may carry slightly more risk, savers should structure their deposits to keep the total amount within the Rs 5 lakh deposit insurance cover provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
Consider Longer Tenures: In a declining rate cycle, lenders usually reduce rates on shorter-term deposits first. Rates for longer maturities take more time to adjust. Therefore, investors without immediate liquidity needs can benefit by locking in favourable rates for medium to long tenures now.
Utilise FD Laddering: This strategy, especially useful for senior citizens, involves splitting an investment amount into multiple FDs with different maturity dates. It ensures only a portion of the corpus gets renewed at potentially lower rates when the cycle bottoms out, allowing reinvestment at higher rates when they rise again.
Explore Corporate FDs (With Caution): For those willing to accept higher risk for potentially higher yields, corporate fixed deposits are an option. However, these instruments carry significantly greater risk compared to traditional bank FDs and require thorough due diligence.
