RBI policy: Lock in FDs now as interest rates expected to decline soon

Currently, investors can benefit from elevated FD rates, which provide a safe haven for their savings amidst uncertain economic conditions.

The Reserve Bank of India (RBI) on Wednesday decided to keep the repo rate unchanged for the tenth consecutive time, signaling a pivotal moment in the interest rate cycle. The shift from an accommodative to a neutral stance indicates that the RBI may be nearing the peak of its interest rate adjustments, making this an opportune time for investors in fixed deposits (FDs) to lock secure higher returns.

For those considering fixed deposits, the current climate presents a unique opportunity. By locking in your deposits now, you can ensure that you receive the best possible returns over the long term. 

"For those with fixed deposits (FDs), now is an opportune moment to lock in high interest rates, as rates are expected to decline in the coming months. The prolonged period of high repo rates has resulted in attractive returns on FDs, with banks offering competitive interest rates to depositors. However, as the central bank prepares for a potential future rate cut based on inflation data and evolving economic conditions, these high FD rates may soon start to taper off. Locking in your deposits now ensures that you can secure the best possible returns for the long term, protecting your savings from future rate reductions," said Adhil Shetty, CEO of Bankbazaar. 

By locking in higher rates today, you can safeguard your returns and maintain financial security as the interest rate trend shifts. With potential rate cuts projected for December 2024 and February 2025, acting now allows you to take advantage of the favourable conditions.

What should investors do? 

Consider investing in short-term to medium-term fixed deposits to capitalize on the current high interest rates. This is especially beneficial if you anticipate a potential rate cut in the near future.   

Laddered FDs: Create a laddered FD strategy by investing in fixed deposits with varying maturities. This helps you diversify your risk and potentially benefit from future rate changes. 

However, one should allocate only a small part of the portfolio to fixed deposits. Just because the interest rates are high, investors should not be tempted to allocate a higher proportion of their assets to fixed income instruments as all FDs are taxable as per your tax slab. Moreover, early withdrawal from fixed deposits is possible, but it often incurs penalty charges.

Consider bonds

"In this context, long-term bonds with current yields look attractive, and investors may want to consider locking them in, especially if global tensions ease and domestic economic indicators remain stable," said Suresh Darak, Founder of Bondbazaar.