Fixed income outlook 2025: Lock into peak rates as cuts are likely

The year 2025 may witness significant activity in the fixed-income space as interest rates are expected to decline. With equity markets consolidating, more investors are likely to explore fixed-income options.

 

“Fixed-income instruments provide a cushion to the investment portfolio. Investors should invest in fixed deposits (FDs) and other fixed-income instruments now and lock the rate before rate cuts take place,” says Pankaj Mathpal, managing director, Optima Money Managers.

 

Interest rate outlook

 

The much-anticipated interest rate cut cycle may be delayed, but experts believe the Reserve Bank of India (RBI) will reduce rates in 2025.

 

“There is scope for a 100 basis points rate cut in a few tranches. Interest on FDs and small saving schemes like Public Provident Fund (PPF) and Monthly Income Scheme (MIS) will come down accordingly. Fresh bonds will be issued with lower coupons, but existing bonds with high coupons will trade at a premium,” says Mathpal.

 

Amol Joshi, founder, PlanRupee, has a cautious outlook. “Recently, the RBI reduced the Cash Reserve Ratio (CRR) and maintained its neutral stance. With inflation projections being revised upwards, interest rates may not come down quickly. Investors will continue to enjoy higher FD rates,” he says.

 

FD choices

 

For fixed-interest options without a lock-in, investors can consider bank FDs or AAA-rated corporate FDs. “Investors can consider corporate FDs, some of which offer 8 to 8.5 per cent interest per annum,” says Parul Maheshwari, certified financial planner. However, these may carry penalties for premature withdrawal.

 

Consider AA or higher ratedcorporate bonds. Limit exposure to a single issuer to 10 per cent of your fixed-income portfolio.

 

Options for senior citizens

 

Senior citizens can explore the Senior Citizens Savings Scheme (SCSS), which offers 8.2 per cent interest and comes with a five-year lock-in. The maximum investment is Rs 30 lakh per person. “SCSS is one of the best choices as there is a sovereign guarantee. It also offers better interest rates,” says Mathpal.

 

Small savings instruments

 

For non-senior citizens in higher tax brackets, schemes like PPF and Sukanya Samriddhi Yojana (SSY) are attractive despite their lock-in periods. “Small savings schemes will remain popular due to attractive interest rates and tax advantages in instruments like PPF and Sukanya Samriddhi,” says Joshi.

 

Additionally, traditional options such as the National Savings Certificate (NSC), offering 7.7 per cent, or Postal Monthly Income Scheme (MIS), offering 7.4 per cent, are viable for non-senior citizens in lower tax brackets.

 

Tax-free bonds listed on stock exchanges are an option investors may consider.

 

Avoid floating rate instruments

 

With interest rates likely to decline, floating-rate instruments such as the RBI Floating Rate Savings Bonds (Taxable) may not be ideal. These bonds currently yield 8.05 per cent and come with a seven-year tenure.

 

Investors seeking sovereign-backed options can consider government securities via the RBI Retail Direct platform. Choose a security that your investment horizon allows you to hold till maturity.

 

Diversify for safety

 

When investing in fixed-income products, balancing considerations like safety, liquidity, and income is essential. “Consider liquidity needs when investing in fixed-income instruments, as options like small savings schemes and RBI bonds have lock-in periods. Diversify across products to maintain flexibility,” says Maheshwari.