Lock into attractive SCSS, FD returns before interest rate cuts begin

Investors with a longer time frame will be better off investing in longer-tenured FDs

Interest rates are expected to decline soon after remaining elevated for an extended period. After the US Federal Reserve’s recent 50-basis-point (bps) cut, other central banks, including the Reserve Bank of India (RBI), will likely follow suit.

“This is a good time to take fixed-income exposure at elevated rates before the softening starts,” says Amol Joshi, founder, PlanRupee Investment Managers.

Rate cuts on the horizon

The RBI has projected inflation at 4.5 per cent for financial year 2025 (FY25), close to its 4 per cent target. With the current repo rate at 6.5 per cent, experts anticipate a 50 basis point cut soon. “I see a repo rate cut of 50 bps to 6 per cent,” says Joydeep Sen, author and corporate trainer (debt).

 

“RBI may cut rates by 50 bps over the next six months, starting with a 25 bps cut in December,” says Pankaj Mathpal, managing director, Optima Money Managers. 

Current rates are attractive

Fixed-income instruments such as bank fixed deposits (FDs), corporate FDs, and small savings schemes (SSS) are currently offering attractive returns. For example, bank FDs of two to three years’ duration are yielding 7 per cent, while the government has kept SSS rates unchanged as of September 30, 2024. “If you want to invest in FDs or the Senior Citizens Saving Scheme (SCSS), now is the right time. Investors can also consider long-term debt funds,” says Mathpal.

Sen notes that any reduction in bank FD rates will lag behind the RBI’s actions. “Bank deposit rates will ease but may not align directly with RBI rate cuts, as credit demand remains strong, and banks need deposits,” he explains.

Which instruments look good?

Several fixed-income products currently offer attractive rates. The SCSS, with an 8.2 per cent interest rate that can be locked in for five years, remains one of the most attractive. The scheme’s investment limit has been enhanced to Rs 30 lakh.

The Mahila Samman Certificate offers 7.5 per cent interest for two years on deposits up to Rs 2 lakh. Select corporate FDs offering around 9 per cent are worth considering. Banks are offering attractive rates for 12-15 month FDs. Investors with a longer time frame will, however, be better off investing in longer-tenured FDs.

“Senior citizens should capitalise on high SCSS rates and lock in investments now. For short-term needs, FDs are a good option. NBFC FDs offer slightly higher rates than bank FDs,” says Mathpal. 

As a rule, match your investment timeframe with the product’s tenure, as premature withdrawals lead to penalties.

Avoid floating rate instruments 

With interest rates set to fall, floating-rate instruments like RBI Floating Rate Savings Bonds may not be ideal. They currently offer 8.05 per cent (35 bps higher than the 7.7 per cent offered by the National Savings Certificate). “Floating-rate instruments will adjust downwards as rates drop, so they are not suitable in a declining interest-rate environment,” says Joshi.

Focus on goals and allocation

Invest according to your horizon. “Young investors should focus more on equity, while retired senior citizens should prioritise fixed income. Mid-career investors should aim for a balanced allocation,” says Sen.

Fixed income allocation should also depend on investment horizon and risk appetite. “Investors with lower risk tolerance and short-term goals should focus on debt instruments,” says Mathpal.