FD Investment: The FD game is over! Is it time to distance yourself from FDs? Falling interest rates will diminish their appeal..

The Reserve Bank of India (RBI) recently cut the repo rate by 25 basis points (bps). Following this decision, interest rates offered by banks and Small Finance Banks (SFBs) on fixed deposits (FDs) are expected to fall further. This is the fourth repo rate cut this year, bringing the total reduction to 125 bps. The repo rate now stands at 5.25%.

Earlier this year, when the RBI cut the repo rate three times, banks and SFBs also reduced their FD interest rates. With another cut, it is almost certain that the interest earned on FDs will decrease further. The big question is, will this lead to a decline in FD investments? While many people in smaller towns and villages still consider FDs a good investment option, the continuous decline in interest rates might deter investors.

Impact on New FDs, Not Existing Ones
It's important to understand that changes in interest rates do not affect existing FDs. If you already have an FD, you will continue to receive the interest rate that was agreed upon at the time of investment. However, if you are planning to open a new FD now, you will receive a lower interest rate. This means you will receive less money at maturity.

How much lower can FD interest rates go?
Banks and SFBs have not yet fully passed on the effects of previous repo rate cuts to their FD interest rates. This means they still have room for further reductions. The recent 25 bps cut makes it even more likely that they will lower FD rates further. However, it's not necessary that the reduction in FD interest rates will be exactly the same as the reduction in the repo rate. Banks determine their rates based on their own convenience and market conditions. It is also difficult to say how long banks will continue to lower FD rates.

Why did the Reserve Bank cut rates?
The RBI cut these rates for two main reasons. Firstly, retail inflation has fallen to a record low. Secondly, the country's GDP growth has accelerated. When inflation is low and the economy is growing, the RBI lowers interest rates to encourage people to spend more, thereby further boosting the economy.

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