Bad news for FDs: Rates to fall sharply as RBI cuts repo rate by 50 bps

Business Standard

2 days ago

The Reserve Bank of India (RBI) cut its repo rate by 50 basis points to 5.5 per cent on Friday, June 6, in its third monetary policy review for the 2025–26 financial year. This is the third straight cut by the Monetary Policy Committee (MPC) this year.
The move is expected to ease borrowing costs, but fixed deposit (FD) investors may not be pleased. Banks have already begun lowering interest rates on deposits, continuing a trend that started after the central bank's earlier rate reductions.
"For depositors, a 50 bps repo rate cut may not slash FD rates overnight, but it does signal the beginning of a downward trend. Banks are likely to start trimming deposit rates, especially for short- and medium-term tenures," said Adhil Shetty, CEO of Bankbazaar.com.
Several of the country's largest lenders have trimmed their fixed deposit interest rates since the RBI began easing policy in early 2025.
< In February and April 2025, the RBI cut the repo rate by 25 basis points each.
< According to a report by SBI Research, FD rates have been reduced by 30 to 70 basis points since February 2025.
< Interest rates on savings accounts have also been brought down to a floor rate of 2.70 per cent, the report said.
Some banks had introduced limited-period schemes to attract deposits, but those are now being withdrawn or adjusted. 'Now they are discontinuing them or lowering the rates on them,' said Santosh Agarwal, CEO of Paisabazaar.
What investors can do now
With fixed income returns shrinking, investors are looking at alternative strategies to protect returns.
"If you've been waiting to lock in current rates, some of which still hover around 7.5%, now may be the time. Senior citizens, who enjoy an extra 25 to 50 basis points, should consider locking in longer tenures," suggested Shetty.
He also recommended diversifying. 'Senior citizens should use FDs for stable income, but must also allocate a portion of their portfolio into equities for inflation-adjusted returns,' he said.
Look beyond traditional options
Aman Gupta, director of RPS Group, said investors should be more hands-on in reviewing options. 'Start with banks and NBFCs that offer the best rates—small finance banks tend to pay 0.5–1 per cent higher than the more orthodox banks,' he said.
He also advised reviewing tax impact. 'Post FD returns after the tax slab are not inflation-indexed; tax saving FDs or Senior Citizen Savings Scheme (SCSS) outperform inflation post taxation and therefore are better alternatives,' said Gupta.
For investors seeking a mix of safety and returns, Gupta pointed to hybrid investment options. 'Channel a portion of the savings towards instruments such as arbitrage or conservative hybrid funds which offer better stability than equities but tend to be volatile relative to bonds,' he said.
'Maintain an emergency fund with six to twelve months of expenses while exploring alternatives,' he added.
"Fixed deposit rates to come down sharply as banks transmit this rate cut. Investors should look at 2 to 3-year corporate bonds for their portfolio as they continue to offer good spreads over government and FD rates, and interest rates will come down more gradually for corporate bonds,' Vishal Goenka, co-founder of IndiaBonds.com said.
Try staggered investments
Siddharth Maurya, founder and managing director of Vibhavangal Anukulakara Private Limited, advised spreading fixed deposit investments across various tenures.
'Try out debt mutual funds, corporate bonds, or RBI floating rate savings bonds as they may yield superior returns after tax,' he said. 'Employ FD laddering—divide your portfolio into several FDs with staggered maturities, for example, 1, 2 and 3 years.'
He also urged depositors to keep an eye on maturity timelines. 'If you have shorter-term deposits, make sure to renew them reliably to bypass auto-renewal at devalued rates,' said Maurya.
Key investor tips
Lock in current FD rates: Consider fixing rates now for medium to long-term tenures.
Use laddering: Spread FDs across different maturities to manage reinvestment risk.
Explore small savings schemes: SCSS and POMIS may offer higher, safer returns.
Consider AAA-rated corporate FDs and debt mutual funds: These may provide better yields but come with some risk.