Repo rate at 5.25%: RBI rate cut crushes hopes of higher fixed deposit (FD) returns

The Reserve Bank of India (RBI) on Friday, December 5, decided to cut the repo rate by 25 basis points (bps) from 5.5 per cent to 5.25 per cent, offering no relief for fixed deposit (FD) investors.

This year, the central bank lowered the repo rate by a cumulative 125 bps in four meetings, beginning in February. In its October policy, the MPC kept the repo rate unchanged at 5.50% and maintained the policy stance as ‘Neutral’.

RBI's rate cut crushes the immediate hopes of fixed deposit (FD) investors who have been waiting on the sidelines for higher interest rates.

"Instead of panic, this is the right time to think strategically. One of the best means is FD laddering: dividing the investments into different tenures so that not all the deposits will be locked at the current lower rates, and there will always be some maturities ready to take the rates if the cycle changes. Senior citizens can choose a combination of bank FDs, high-rated corporate FDs, and small savings schemes for safety with slightly higher yields instead of depending on just one product," said Shashank Gupta, Director, RPS Group

"The cut in the repo rate by the RBI once more signifies the end of very appealing fixed deposit returns for FD investors, at least for a while. Senior citizens can also opt for a combination of bank FDs, a few corporate FDs, and small savings schemes to get a blend of safety and slightly higher yields rather than sticking to a single product," said Siddharth Maurya, Founder & Managing Director, Vibhavangal Anukulakara Pvt. Ltd.

The FD dilemma: Lock-in or wait?

For the average FD holder, this indicates that commercial banks are unlikely to offer significantly better rates in the near term.

Personal Finance experts are now urgently advising conservative investors to take action and look beyond other investment avenues apart from term deposits in order to beat inflation and protect their portfolio from any potential future rate reductions.

Are FD rates going to fall further?

The risk of falling FD rates is very real. Historically, after the RBI concludes a rate-cutting phase, banks gradually follow suit by reducing their deposit rates.

This makes it a great time for cautious investors to secure today’s rates before they go down.