What Does Rate Cuts by RBI Mean for Bank Depositors

These decisions were taken considering the exacerbated uncertainties clouding the economic outlook across regions since Trump 2.0 tariff-related announcements, posing new headwinds for global growth and inflation.

Trump's tariff tantrums have also led to a sharp fall in the financial markets: equities witnessed intense volatility and eroding investors' wealth, while bond yields also are softening. On the other hand, gold has turned bold amidst the looming macroeconomic and geopolitical uncertainty.

[Read: Trump Tariff Tantrum and Its Impact on Equity, Debt, and Gold Outlook]

With two successive policy rate cuts by the RBI, bank depositors are left to wonder what the interest rates on bank FDs would be going forward.

Path to Interest Rates

The change in accommodative stance in the monetary policy passes a hint that the RBI would be open to further rate cuts to support growth if inflation stays well within the RBI's target range (of 4.00% within a band of +/- 2.00%).

At present the MPC has observed that is currently below the target, supported by a sharp fall in food inflation. Moreover, there is a decisive improvement in the inflation outlook.

As per RBI's projections, there is now greater confidence of a durable alignment of headline inflation with the target of 4.00% over a 12-month horizon.

The resolution of the MPC distinctly states that amid challenging global economic conditions, the benign inflation and moderate growth outlook demand that the MPC continues to support growth.

In simple terms, what this means is that interest rates on bank deposits would go down in time to come.

Some banks have already cut their deposit rates before RBI's April 2025 bi-monthly statement. Some high interest yield bank Fixed Deposits have also been withdrawn.

Going forward, many more banks would recalibrate and reduce their deposit rate to steer clear of asset-liability mismatch.

Impact on Risk-Averse Investors and Retirees

Lower deposit rates would hurt risk-averse investors and senior citizens who predominantly park their hard-earned money into bank FDs to earn stable/fixed returns to manage their cash flow needs.

But before that RBI reduces policy rates further in the ensuing meets and its transmission happens at banks, it makes sense to invest/book or lock in at the current interest rates.

In times when financial markets are expected to be volatile impacting the returns of market-linked investment avenues, bank FDs would add stability to your portfolio regardless of the market conditions.

While lately, Trump has paused tariffs on most countries except China and the Indian equity market has rebounded, the geopolitical and macroeconomic environment still calls for caution. Note that along with wealth creation, capital protection is also essential to investing---this is where bank FDs fit in.

As you may be aware, bank FDs come with a DICGC insurance coverage of up to Rs 5 lakh per depositor per bank, adding another layer of safety. If you spread your FDs across multiple banks in combination with joint holdings and/or single account holdings, the DICGC protection can further be maximised.

To maximise the returns on the bank FD, ideally considering your liquidity and cashflow needs follow the laddering strategy.

Under the laddering strategy, you spread your FD investments across multiple maturity tenures or maturity buckets (e.g. 6 months, 1 year, 2 years) by choosing tenures thoughtfully (considering your liquidity needs) rather than locking all your money into one or two FDs.

When each FD in the ladder matures at the specified interval, you'll have the maturity proceeds available to use for whatever purpose. If the maturity proceeds are required (in full or partially), they can be reinvested prudently in the interest of your financial well-being.

The FD laddering strategy offers you the financial flexibility to access money at regular intervals without breaking long-term deposits prematurely.

To conclude...

The year 2025 shall prove why asset allocation matters. Diversification is the basic tenet of investing. Bank FD ought to be an integral part of not just risk-averse investors and retirees' portfolios but tactically also of risk takers.

Deploying some portion of your investable surplus into bank FDs shall ensure that you have sufficient liquidity to quickly access cash when you need it with little or no penalty for early withdrawals.

If you're saving for shorter-term goals, FDs can be a relatively safer option, ensuring that you have the funds available to you without exposing your hard-earned savings to the volatility of the equity market.

Likewise, to address contingency needs, it makes sense to have around 6 to 18 months of regular monthly expenses, including EMIs, in a couple of bank FDs (in suitable tenure options) instead of having to borrow from someone or prematurely redeeming investment assigned to meet certain envisioned financial goal/s.

Keep in mind that a sensible approach paves the path to your financial success.

Be a thoughtful investor.

Happy Investing!

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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.