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RBI policy: Interest rates on fixed deposits likely to fall –

Interest rates on your fixed deposits (FD) and savings bank accounts look set to head south. A sharp cut of 40 basis points (bps) in the repo rate announced by the Reserve Bank of India (RBI) earlier is now expected to have an impact on your savings bank rates. The central bank has announced repo rate cuts of 115 bps since March 25.

How does this reduction in the repo rate impact depositors?

As the benchmark policy rate goes down, the interest rates on fixed income instruments are also expected to follow suit. Existing FD investors don’t have anything to worry about until their deposits come up for renewal. But fresh investments in FDs and RDs may give you much lower returns.

As banks pass on lower loan rates to borrowers, it is but natural that deposit and savings account rates too decline.

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Adhil Shetty, CEO of an online aggregator of financial products says, “There is a strong chance that savings bank interest rates may come down further, making it unprofitable for customers to leave large sums lying in the savings account.”

After RBI’s rate cut in March 2020, the State Bank of India announced a reduction in fixed deposit interest rates by up to 50 bps. Other leading public and private banks also announced similar rate cuts in April. Currently, State Bank of India (SBI) is offering 5.50 per cent for its one-year FD and senior citizens earn 6 per cent a year.

What should you do?

In these uncertain times of COVID-19, knee-jerk announcement of rate cuts in savings accounts and deposits from banks is likely.

With a further rate cut, it’s possible that the deposit rates in FDs for up to six months tenure will be similar to interest in savings accounts. It will be interesting to see whether banks will continue offering FDs that mature within six months. Veena Sivaramakrishnan, partner, Shardul Amarchand Mangaldas & Co. says, “Even if marginally there is a difference in rates, banks will offer the sub-six months FD as a product. A policy change to discontinue a product is optically a negative sign and would be avoided by a banking institution.”

Alternative investment avenues

Given the possible decline in FD rates, what are the other options for depositors? Hemant Sood, MD, Findoc says, “Fixed deposit investors should now look for other options in the market to generate fixed secured income and better returns.” The elderly can consider the senior citizens savings scheme, PM Vaya Vandana Yojana and RBI’s taxable 7.75 per cent bonds. These are secure investments offering reasonable returns.

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