The Reserve Bank of India (RBI) has cut the repo rate by 25 basis points (bps) to 6.25%, marking the first reduction in almost five years. This move could impact fixed deposit (FD) interest rates, giving investors a final window to lock in higher rates before banks start lowering them.

Why do FD rates fall when the repo rate is cut?

The repo rate is the interest rate at which the RBI lends money to banks. When the central bank lowers this rate, banks can borrow funds at a lower cost.

This encourages them to reduce lending rates on loans, making borrowing cheaper.

However, it also leads to a drop in deposit rates, as banks don’t need to offer high returns to attract funds.

Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS, explained, “The RBI reversed the interest rate cycle by announcing a rate cut of 25 bps after holding rates steady for a couple of years. This was largely anticipated after the liquidity-boosting measures in late January 2025.”

Impact on fixed deposit investors

For FD investors, especially senior citizens who rely on interest income, falling deposit rates mean lower returns.

If banks reduce rates soon, new FD investors will earn less than those who locked in at earlier, higher rates.

Siddharth Chaudhary, Senior Fund Manager – Fixed Income, Bajaj Finserv AMC, said, “Market reaction shows expectations of further liquidity measures, but the governor has indicated proactive action to support growth.”

Mahendra Kumar Jajoo, CIO – Fixed Income, Mirae Asset Investment Managers (India), said, “Policy is a positive response to fiscal consolidation and may signal more rate cuts ahead. Bond yields are expected to ease further.”

This means investors who rely on FDs for income may need to look at alternative investment options to maintain their returns.

Strategies for FD investors

With FD rates likely to drop, investors can consider:

Locking in current rates: Those planning to open an FD should do so soon before banks lower their rates.

Exploring alternative investments: Debt mutual funds, corporate bonds, and equity-linked savings schemes (ELSS) could offer better returns.

Laddering FDs: Splitting investments across different tenures ensures liquidity and better interest rate management.

Reviewing existing FDs: Checking if current FDs allow premature withdrawals could be useful, especially if reinvesting in better options.

Ankur Maheshwari, CFO of Freo, said, “A diversified approach that includes both fixed and market-linked investments can help mitigate the impact of fluctuating interest rates.”

A look at current FD rates of some of the public sector banks

(Source: Paisabazaar)

Will there be more rate cuts?

Experts believe another rate cut of 25 bps is possible in upcoming RBI meetings. “We hold our view of a 50 bps rate cut in this cycle as macro and global data do not warrant more easing,” said Chaudhary.

Rajeev Radhakrishnan, CIO – Fixed Income, SBI Mutual Fund, said, “While the rate cut was expected, the lack of specifics on liquidity could impact transmission. However, RBI is likely to support liquidity in the coming months.”

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