Following the recently released monetary policy review by the Reserve Bank of India (RBI), there is a discussion among investors on where to invest their money. With a repo rate of 6.5%, the RBI has opted for a neutral approach, resulting in a balance of inflation management and economic growth. However, what does this entail for fixed deposit (FD) investors? Let’s analyze the key implications of the RBI monetary policy update to help you decide.
Fixed Deposit Rates In Updated RBI Monetary Policy: Are They Nearing a Peak?
Its decision to keep the repo rate unchanged indicates that interest rates for fixed deposits might have already peaked. Over the past 21 months, the repo rate has consistently stayed flat post its last increase in June 2023. Although stability has resulted in high FD rates, it has been predicted that this will lead to a decrease in the number of FD rates by February 2025.
For short-term FD investors, this signals caution. With the expected rate cut on the horizon, banks might soon lower interest rates to align with monetary policy changes. If you’re considering locking your funds in short-term FDs, you may want to act before February to take advantage of current rates.
How Does the CRR Cut Impact Investments?
Amongst the major actions taken by the RBI was its decision to reduce the cash reserve ratio (CRR) by 50 basis points to 4%. This shift injects into the banking system ₹1.16 lakh crore of liquidity, which has significant implications for the financial sector. Consequentially, this enhanced liquidity may drive short-run interest rates even lower, in the eyes of FD investors.
However, the CRR cut is beneficial to the debt mutual funds, especially to the short-duration and liquid funds. This presents a viable alternative for investors seeking higher returns with moderate risk. While FDs remain a secure option, diversifying into quality debt funds may offer better opportunities in the current economic climate.
Should Long-Term FD Investors Worry?
Very low long-term FD rates are unlikely to be massively cut. As per the experts, investors having medium to long-term outlook can still reap the benefits by investing the funds into long-term FDs or considering government bonds/bank infrastructure bonds for better returns. For these investors, the long-term yield stability is an opportunity which is allowing them to secure attractive rates before any potential declines.
Is It Time to Explore Debt Funds?
Debt mutual funds are becoming a promising alternative for those who are open to portfolio diversification. RBI monetary policy review update has maintained the stability of yield, short-term, and liquid funds are very attractive for investors having 6-12 month horizons. In the meantime, medium- to long-term investors can investigate funds, which have a duration of 6-7 years, as they can provide an ideal risk-reward balance in the present environment.
The RBI’s announced monetary policy review again highlights the strategic nature of investment decisions. While short-term FDs may face rate reductions, long-term FDs and debt mutual funds remain attractive options. Diversifying your portfolio by considering a combination of Fixed Deposit and good debt investments, in anticipation of expected changes in rates, can serve as a facilitator.
Also, see: Gold Prices Drop to Lowest: Should You Invest in Gold in India Now?