Should you invest in fixed deposits now with RBI keeping repo rate unchanged?

The Reserve Bank of India’s recent decision to retain the repo rate has left investors pondering their next steps, particularly those considering fixed deposits as a safe and reliable investment option. With the RBI signalling stability in its monetary policy, it raises the question: Is now the right time to invest in fixed deposits (FDs)?

For conservative investors looking for predictable returns, fixed deposits have traditionally been a go-to option. The RBI’s decision to keep the repo rate steady for the 11th time provides a certain degree of clarity regarding interest rate expectations in the short to medium term. However, there are a few factors to consider before making the decision.

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Stability of fixed deposit returns

First, the repo rate, which serves as the benchmark for lending rates, plays a significant role in determining the returns on FDs. With the RBI opting to pause rates again, FD rates offered by banks may remain stable in the near future, as lenders typically adjust their rates in line with the central bank’s moves. This stability in rates may be appealing to investors seeking a predictable income stream without the risk associated with market fluctuations.

According to Vishal Goenka, Co-Founder of IndiaBonds.com, the RBI’s stance in its recent policy meeting is a demonstration of a measured and cautious approach.

“Fixed income investing prefers a stable, almost ‘boring’ environment and that is exactly what has been delivered. Investors to continue using fixed income for effective portfolio construction. A barbell strategy with buying short end corporate bonds with long end G-sec and bank infra bonds is suggested for benefiting from carry as well as potential capital gains,” Vishal Goenka, Co-Founder of IndiaBonds.com told CNBC-TV18.

Inflation a key risk to real return on FDs

However, the Monetary Policy Committee (MPC) has raised its inflation forecast, reflecting the persistence of inflationary pressures, while revising downwards its growth expectations, signalling potential challenges ahead. If inflation remains elevated, the real return on FDs may be eroded, especially if the rates offered by banks are lower than the inflation rate.

This makes fixed deposits less attractive in real terms, as they may not offer substantial growth when adjusted for inflation.

Nevertheless, with the repo rate untouched, investing in fixed deposits could make sense for those seeking stability and capital preservation, especially in uncertain times.

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