For short-term investment needs, investors can consider liquid, overnight, or short-term debt funds. Senior citizens looking for stable and occasionally high returns may consider long-term and gilt funds
Globally, central banks have started slashing rates. The Reserve Bank of India’s (RBI) stance also indicates that a rate cut is imminent. There are also signs that domestic inflation is slowly coming under control, making it very likely that the rate cuts will happen in the next year.
“However, the central bank's decision-making on rate cuts will be influenced by several factors, including inflation rates, overall economic growth, and trends in global monetary policy. In the Dec 2024 MPC meeting of RBI, the governor explained that all high-frequency macro data since October indicated that the economy has bottomed out and remains resilient, which does not warrant any knee-jerk policy measures. Hence only cash reserve ratio (CRR) was cut by 50 basis points,” says Madhupam Krishna, Securities and Exchange Board of India (Sebi) registered investment advisor (RIA) and chief planner, WealthWisher Financial Planner and Advisors.
RBI kept the repo rate unchanged for the eleventh time in a row at 6.50 per cent. But, in the same meetings after the policy announcement speech RBI, acknowledged the current slowdown in growth. “They (RBI) appear to be seeking more evidence to confirm this trend leading us to believe that the next MPC policy in February 2025 will be a live policy for a repo rate cut of 25bp,” says Krishna.
The Likely Impact Of Rate Cuts
Debt investors of all ages and genders are affected by low rates. The reduction in rates tends to impact other debt instruments also. Interest rates for instruments like PPF, Post Office deposits, SSY, and RBI Bonds are quarterly revised.
The Department of Small Savings will reduce these in line with the rates prevailing in the economy. Long-term rates like EPF also get impacted when they are revised by the Labor Ministry. The rate cut will be a severe blow to Senior Citizens living on FD Interest rates. They are risk-averse investors favouring a fixed rate of return rather than risky equity or gold returns.
How To Cope With Rate Cuts
What should one do when there are rate cuts in small savings schemes? “The first way to survive is to book long-tenure FDs when the rates are high. Instead of one to three years, a person can go for five to seven years tenure,” says Krishna.
Adhil Shetty, CEO, BankBazaar, a fintech firm says that this is a good time to invest in debt funds. “We are expecting interest rate cuts at some point in 2025. When interest rates fall, the prices of bonds go up. This has a direct, positive impact on the NAV of bond funds. In previous years where rate cuts happened (such as 2015, 2019, and 2020), long-duration debt funds delivered handsome, double-digit returns. “For short-term investment needs, investors can consider liquid, overnight, or short-term debt funds. Senior citizens looking for stable and occasionally high returns may consider long-term and gilt funds,” says Shetty.
“Another way is to gradually start increasing allocations in multi-asset allocation and hybrid funds. These funds have a little more risk, as funds invest in equity, gold, and debt instruments. But if managed properly can beat FD returns with a good margin. But as equity is one of the main components, one must match his risk appetite with his investment goals,” says Krishna.