Is your fixed deposit earning less than before? Will your home loan EMI reduce? And is it time to rethink your investment strategy? These questions are more relevant than ever after the Reserve Bank of India (RBI) announced a sharp 50 basis point cut in the repo rate, bringing it down from 6% to 5.5%. This is the third rate cut this year, with previous 25 basis point cuts in February and April—adding up to a full 1% drop in 2025 so far.
The move comes as a significant benefit for home loan, auto loan, and personal loan borrowers. With a lower repo rate, banks typically reduce their lending rates, making EMIs cheaper and borrowing more affordable. This is a welcome relief especially for middle-class salaried individuals.
However, this decision casts a shadow over fixed deposits. The interest on FDs is expected to decline further. SBI Research data shows that between February and May 2025, banks reduced FD interest rates by 30 to 70 basis points. In addition, interest on savings accounts has dropped to a historic low of 2.70%. With the latest rate cut, banks are likely to reduce FD rates even more.
Senior citizens, who largely depend on FD returns, are advised to invest now at the current rates—particularly in long-term FD schemes. Some banks are still offering up to 7.5% for senior citizens, but these rates might not last much longer.
This rate cut creates a dilemma for investors relying on FDs. Experts suggest it's time to look beyond traditional fixed deposits. Alternative investment options like small finance banks offer slightly higher returns (0.5% to 1% more than regular banks) though they carry higher risks. Other avenues include Senior Citizens Savings Scheme, tax-saving FDs, and hybrid or arbitrage mutual funds. These options may provide returns that can beat inflation, even after tax deductions.
Maintaining an emergency fund covering 6 to 12 months of expenses is crucial, especially in low-interest periods. Another vital tip—spread your FD investments across multiple banks in sums of ₹5 lakh or less. This ensures your deposits remain insured under the DICGC scheme, which covers both principal and interest.
The RBI hasn’t just cut the repo rate. It has also announced a reduction in the Cash Reserve Ratio (CRR) from 4% to 3%. This will be implemented in four phases between September and November. The move is expected to release ₹2.5 lakh crore into the banking system, boosting liquidity and encouraging more lending.
Another significant change is in the RBI’s policy stance—it has shifted from an ‘accommodative’ stance to a ‘neutral’ one. This means future rate actions will depend on inflation and economic growth data rather than a default easing bias.
The impact of these measures is already visible in the stock market. Sectors such as banking and real estate have seen increased investor interest. Shares of NBFCs and housing finance companies have also rallied.
So while the EMI burden is set to reduce, fixed deposit returns are likely to fall further. This makes it essential for investors to reassess their financial strategies. Understand your financial goals, investment time horizon, and risk appetite before deciding where to allocate your funds. Those not yet invested in FDs might want to lock in current rates soon before they decline further.
In summary, the RBI's decision is a double-edged sword—a pleasant surprise for borrowers, but a cautionary tale for FD investors. Staying informed and proactive is key in managing your personal finances during such shifting times.
Disclaimer:
The information provided in this article is for educational and informational purposes only. It does not constitute financial advice or a recommendation to invest. Please consult a certified financial advisor before making any investment or financial decisions. The author and publisher are not responsible for any financial losses arising from decisions made based on this content.
