RBI’s 25 bps rate cut signals end of high FD returns; experts urge investors to act now before more cuts

The Reserve Bank of India’s decision on December 5 to trim the repo rate by 25 basis points to 5.25 per cent has set off a fresh recalibration in the fixed-income landscape. This fourth rate cut since February is widely expected to push banks toward lowering fixed deposit (FD) rates in the coming weeks—an unwelcome development for risk-averse savers and senior citizens who rely on stable interest income.

“Banks have reduced rates across nearly all tenures, with the sharpest cuts in the one-to-two-year bucket. High-yield FDs have become rare, and another easing cycle will drag peak rates even lower,” said Adhil Shetty, CEO, BankBazaar.

While the change announced by RBI Governor Sanjay Malhotra does not immediately force banks to revise deposit cards, most lenders are expected to adjust rates—particularly on short- and medium-term deposits—once the monetary policy signal transmits into the system. “For conservative savers and retirees, this is the window to lock in longer tenures and capture the last of the higher slabs. Senior citizens can still avail 50 basis points more than standard rates,” Shetty added.

Lock in or wait?

For most depositors, the message is clear: banks are unlikely to raise rates anytime soon. Personal finance experts warn that those depending solely on FDs to beat inflation may find it harder to preserve real returns in a falling-rate cycle. They urge savers—especially retirees—to diversify smartly and plan ahead for potential future reductions.

Financial advisers recommend adopting an FD laddering approach—dividing capital across multiple tenures to avoid being locked into uniformly lower rates later. This approach allows savers to maintain liquidity and reduce reinvestment risk.

Key points to evaluate:

• Split deposits across varied maturities to manage rate volatility
• Maintain liquidity through staggered renewals
• Balance exposure between bank FDs, corporate FDs and government-backed instruments
• Align investments with risk level, goals and time horizon

Corporate FDs, select debt mutual funds and government securities are also emerging as viable alternatives, though each carries differing degrees of risk and needs careful evaluation.

The latest rate cut signals that the phase of high FD returns is likely coming to an end, making it important for savers to plan carefully rather than react with panic. A laddering strategy can help preserve returns in a declining rate environment while still providing chances to reinvest at better rates if the cycle reverses.

Will FD rates drop further?

The possibility of more cuts looms large. Historically, banks follow a monetary easing cycle by gradually reducing their deposit rates. With inflation subdued and growth strong, the RBI retains room to ease further if conditions require additional stimulus. This makes the present moment crucial for savers seeking to secure higher rates.

Since February—when the MPC began cutting rates for the first time since May 2020—banks have already trimmed deposit rates by 50 to 100 basis points. Small finance banks (SFBs) and mid-sized lenders have cut more aggressively, in some cases by 150–225 basis points.

For instance, SBI’s top rate under the Amrit Vristhi scheme has slipped from 7.1% in January to 6.6% currently, while HDFC Bank’s highest FD rate has also eased from 7.25% to 6.6%. These reductions reflect only a partial transmission of the cumulative 100-basis-point cut so far.

The sharper declines among smaller lenders underscore that FD pricing is also shaped by liquidity conditions, deposit competition, credit demand and each bank’s asset-liability profile.

“From a depositor’s perspective, a 25-bps cut raises clear concerns about shrinking returns on fixed-income products,” said Ankur Jalan, CEO, Golden Growth Fund. While existing FDs remain unaffected, new deposits will likely fetch lower maturity values once banks revise rates.

Alternative assets

As traditional deposit yields decline, investors seeking higher real returns may increasingly turn to non-traditional assets. “Affluent investors and family offices often reallocate capital toward higher-yielding instruments such as real estate-linked Category II AIFs. This helps preserve real returns while improving fundraising conditions for developers,” Jalan said.

With the rate cycle firmly in easing mode, financial planners stress that depositors must respond proactively—either by locking in today’s rates or by building diversified portfolios that withstand the next leg of declines.