With the RBI-MPC reducing the repo rate by 25 basis points to 6.25 percent on February 7, depositors might have to brace themselves for lower fixed deposit interest rates and reduced passive income in the months to come. However, they can consider locking their funds into special-rate FDs that are being offered by several banks until March 31, 2025.
The repo rate cut makes fixed-income investments less attractive, affecting conservative investors who rely on fixed deposits interest income.
The Reserve Bank of India (RBI) on February 7 reduced the repo rate by 25 basis points (bps) to 6.25 percent, its first rate cut in five years, bringing cheer to borrowers. For depositors, however, this could signal the beginning of lower returns on their bank deposits.
While banks may not be in a hurry to cut deposit rates after the RBI’s first monetary policy review of 2025, it may be time for depositors to review and reassess their investment strategy. “They may wait for this quarter to be over. This is a busy quarter for everyone. Credit growth is also good in this quarter. For that, they definitely need deposits also. My view is that, a few banks may take a call but most banks will wait for the next quarter to see if they want to cut deposits,” SBI chairman CS Setty said in an interview.
What does RBI’s repo rate cut mean for depositors?
“The repo rate cut makes fixed-income investments less attractive, affecting conservative investors who rely on fixed deposit (FD) interest income,” said Kirang Gandhi, a Pune-based financial adviser.
With lower FD rates, investors can expect reduced passive income, making it challenging for retirees to find safe investment options that offer attractive yields. “The lower FD interest rates will not only reduce passive income for investors but also leave senior citizens facing a challenge in finding safe investment options that offer attractive yields,” Gandhi said.
Lock your investments in special-tenure FD schemes
Leading banks such as Bank of Baroda (BoB), Indian Bank and State Bank of India (SBI) are offering special-tenure, higher-rate deposit schemes, introduced in mid-2024, till March 31, 2025.
These specialised FD schemes provide higher interest rates, compared to traditional FDs. They are suitable for risk-averse investors who wish to optimise their returns in the short term.
For instance, Bank of Baroda’s BoB Utsav Deposit Scheme comes with a tenure of 400 days, while SBI has launched Amrit Vrishti and Amrit Kalash schemes with maturity periods of 444 days and 400 days, respectively. Indian Bank’s Ind Supreme term deposit carries a tenure of 300 days.
Higher interest rates for a limited period
BoB Utsav Deposit Scheme offers an interest rate of 7.3 percent per annum for 400 days. Senior citizens earn an additional interest rate of 0.5 percent at 7.8 percent.
Similarly, SBI’s Amrit Vrishti offers an interest rate of 7.25 percent per annum on a deposit of 444 days. Senior citizens earn an additional interest rate of 0.50 percent (7.75) for 444 days.
Interest rates under the special schemes are higher, compared to regular tenure FDs.
For instance, BoB’s one-year FD offers 6.85 percent a year, while its 400-day special tenure FD fetches a higher 7.3 percent return. Similarly, SBI’s one-year to less than two-year FD offers 6.8 percent, whereas its 444-day Amrit Vrishti scheme yields 7.25 percent, offering higher returns for a shorter tenure.
Opt for laddering strategy
Act now to lock in higher FD interest rates, Shetty advised, as banks are likely to reduce deposit rates and investors can maximise their returns by investing before the rates drop.
Consider laddering the FDs by investing in multiple FDs with different maturities. This will help manage interest rate risk and ensure liquidity.
A laddering strategy involves diversifying bank FD investments across various maturity periods, creating a “ladder” of maturity dates. This approach provides regular liquidity, allowing you to access funds as needed, while also offering opportunities to reinvest at potentially higher interest rates in the future.
For short-term deployment, one can choose between FDs and liquid funds.
Know the limitations
By investing in FDs, your funds are tied up for the selected tenure, restricting easy access to your money. In the event of an unexpected expense or emergency, withdrawing from these investments may attract penalties or additional costs.
“FDs offer capital protection and slow growth but they may not be ideal for long-term wealth creation,” said Shetty. After accounting for taxes and inflation, the returns can actually be negative, eroding the value of your investment.
Special and regular FD schemes come with additional limitations, making it essential for depositors to understand the terms and conditions before investing. For instance, the BoB Utsav Deposit scheme offers both callable and non-callable options. With callable options, investors can withdraw their funds prematurely, whereas non-callable schemes do not permit early withdrawals, requiring investors to keep their funds locked in until maturity.
Source: www.moneycontrol.com
