Gloom for savers: How RBI repo rate cut will impact FD investments, savings

The recent spate of rate cuts by the Reserve Bank of India could be bad news for savers

In a new set of measures to reduce the impact of coronavirus lockdown on the economy, the Reserve Bank of India (RBI) on Friday decided to cut the repo rate by 40 basis points from 4.4 per cent to 4 per cent. The reverse repo rate was also reduced by 40 basis points to 3.35 per cent. What will be the impact of these rate cuts on fixed deposits (FDs), one of the most popular investment avenues?

Many people prefer bank FDs over equities as the former are considered safe. However, the recent spate of rate cuts could mean another bad news for savers.

How RBI rate cut will impact investors

— Interest income from FDs is likely to fall further

— The rate cut comes as a pain also for senior citizens dependent on interest income from their FD investments

After RBI's previous rate cut in March, the country's largest lender State Bank of India had announced a reduction in fixed deposit interest rate by up to 50 bps. The rates were further revised on May 12, 2020.

Other major banks have also continued lowering interest rates on fixed deposits.

How RBI rate cut will impact savings?

The interest rate determines how much money a bank pays you to park your funds with it. With interest rates declining, the amount saving account holders earn in interest is affected inversely. 

Note: 100 basis point equal one percentage point

Recently, a few banks announced special fixed deposit (FD) schemes for senior citizens with higher interest rates. Here's a look at who is offering what:
 

State Bank of India: According to the bank, its SBI WECARE Senior Citizens Term Deposit scheme was launched to provide a higher interest rate to senior citizens in the current falling-interest-rate scenario, as this category of investors is usually dependent on interest income. The scheme will fetch 0.8 per cent above the interest rate applicable to the general public.
 

HDFC Bank's Senior Citizen Care FD: This offers an additional 75 basis points (bps) for deposits with more than 5-year tenors with investments up to Rs 5 crore. Those who want to invest in the scheme can do so between May 18, 2020, and September 30, 2020.

ICICI Bank's Golden Years FD scheme: This is applicable on fresh FDs as well as renewals. With an interest rate of 6.55 per cent a year for deposits up to Rs 2 crore with a tenure of more than five years (up to 10 years). According to the bank, the scheme is available from May 20 to September 30, 2020. The scheme "offers 80 bps more than what is applicable to general public (non-senior citizens) for the same deposit amount and tenor. Also, it is 30 bps more than the previous rates offered by the bank.

It remains to be seen if Friday's rate cuts will have an impact on these schemes.