RBI Monetary Policy: Should you lock your savings in the fixed deposits before the rate cut cycle kicks off?

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) on Thursday has kept the repo rate steady at 6.5 per cent for the ninth consecutive time.

There are speculations that the RBI could slash the repo rate later this year, thus kicking off the rate cut cycle from the next calendar year. Lower interest rates would, more likely than not, ensure lower interest rates on fixed deposits as well.

As a result, depositors will have to settle for lower interest rates on their fixed deposits (FDs). And until such time, depositors are recommended to lock money in fixed deposits (FDs), say wealth advisors.

After all, a marginal decline in interest rate can make a noticeable difference in the overall wealth creation of investors over a long period of time.

Let us understand this with the help of an illustration: A small difference of 25 basis points can make a difference of ₹3,750 when an FD of ₹5 lakh is locked for 3 years at an interest of 7.5 percent before rising to 7.75 percent. (1,1,6,250 - 1,12,500 = 3,750)

And when the difference is 50 basis points, the difference can be ₹7,500 on the FD of the same amount for the same tenure. (1,20,000 -1,12,500).

So, higher the amount and tenure, the larger would be the difference.

Time to lock the FDs?

No wonder then the wealth advisors highly recommend investors to lock their fixed deposits (FDs) at the prevailing high rates of interest which have been rising for a long time.

Murthy Nagarajan, head, fixed income, Tata Mutual Fund, says,“The long-term prospects for debt market is favourable as CPI inflation is expected to come down to 4 percent. Investors should go long on their debt allocation as we may have 50 to 75 basis point of rate cut in the coming months.”

He adds, “Global markets have become favourable for fixed income due to rate cuts by ECB and UK. US unemployment rate is now at 4.3 percent and July non-farm payroll data has come at Rs. 114000 versus market expectation of Rs.185000. The US market is factoring 125 basis of rate cut in the next three FOMC meeting.”

Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services, says, “Fixed deposits are one of the most favourite investment products for retail investors because of their assured return and safety to the capital. For a couple of years, we have witnessed good interest rates as RBI had a constant view on interest rates in their monetary policies for cooling the inflation and money supply in the market.”

“Now we can see that due to RBI's policies, inflation is somewhat controlled in India, also monsoon is good in our country and thereseem somesignals of a USrecession whichcan lead to a reverse in theinterest rate cycle in the near future by FED and RBI. That is why if your financial goal is 2/3 years you can now lock the requiredamount in a fixed deposit. Don't wait any longer,” she adds.

However, Ms Zende cautions investors when she says that just because currentinterest rates on fixed deposits (FDs) are lucrative, it is not advisable to get tempted to lock a major chunk of your money in term deposits.

“Fixed deposits are taxable and in the long run, they fail to generate inflation-hedged returns. So, take a proper call as per the required asset allocation of your financial goals,” she adds.

To sum up, getting money locked up in a fixed deposit (FD) at the prevailing high rates is advisable now because the interest rates may start to go down soon. And when that happens, starting a new FD will be far less tempting than it is now.