Falling interest rates: Senior citizens should lock into longer-term FDs, small saving instruments

Senior citizens can explore small savings schemes and longer-term FDs, among other instruments, in a benign interest rate scenario

With the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) reducing the repo rate by 25 basis points (bps) and changing the stance from ‘neutral’ to ‘accommodative, fixed deposit rates are bound to come down this year, which means that senior citizens who depend on these instruments for regular income, in particular, will be affected.

"Going forward, absent any shocks, the MPC is considering only two options—status quo or a rate cut,” RBI Governor Sanjay Malhotra said during his post-monetary policy address on April 9.

On cue, Bank of India (BoI) has announced the withdrawal of its special-rate 400-day fixed deposit scheme from April 15, which offered an interest rate of 7.3 percent, besides reducing interest rates across tenures. HDFC Bank has reduced its savings account interest rate from 3 percent to 2.75 percent.

Tap small saving schemes

Besides bank fixed deposits, senior citizens also look at national small saving instruments offered by post offices and banks as savings options. The finance ministry has left the small saving rates unchanged for the April-June 2025 quarter.

“Senior citizens should use this window to lock into these rates, which are higher than FD returns. Senior citizen saving schemes (SCSS) offer a much higher interest rate. They can invest up to Rs 30 lakh in this scheme, as can their spouse, which would take the family investment to Rs 60 lakh. The National Savings Monthly Income Scheme (otherwise called the Post Office Monthly Income Scheme or POMIS) and National Savings Certificates (NSC) are the other two remunerative options,” said Preeti Zende, founder, ApnaDhan Financial Services, and who is also an investment advisor registered with the Securities and Exchange Board of India (SEBI).

They could also look at quality AAA-rated corporate fixed deposits, or FDs offered by non-banks. “These FDs, floated by companies with a good track record, can fetch higher returns than bank FDs. They can deploy some funds into these instruments with a monthly interest payout option to take care of day-to-day expenses,” she added.

For example, SCSS will offer an interest rate of 8.2 percent per annum (quarterly payout) at least until June 30, when another review will take place. Likewise, POMIS offers an interest rate of 7.4 percent per annum (payable monthly) at present, while the NSC interest rate is 7.7 percent (compounded annually, payable at maturity). State Bank of India’s regular fixed deposits with tenures of more than three years currently carry an interest rate of 7.5 percent for senior citizens. HDFC Bank also offers interest rates of 7.5 percent for FDs with tenures longer than two years.

Also read: RBI rate cut: Time to lock in fixed deposits, load up on long bonds, say experts

Lock into longer-tenure fixed deposits

Since interest rates are set to fall further, senior citizens ought to carefully consider options if their fixed deposits are coming up for renewal soon. “Often, there is a tendency to opt for shorter-term deposits over long-term term FDs if the former offer slightly higher or even the same rate of interest. However, at present, you would be better off picking FDs with tenures of over three years even if the interest rate is lower by, say, 25 bps. Focus more on the tenure this time,” advised Vishal Dhawan, founder, PlanAhead Financial Planners.

This, he said, is because the benign interest cycle is expected to continue for a few years. “Generally, the interest rate cycles in the country last for between two and three years. My sense is  locking into FDs with a tenure of over three could be a good strategy to think of at the moment,” Dhawan added.

Despite the ongoing market volatility, financial advisors feel senior citizens should allocate a part of their investments to equities as well. “It is also a good time to direct some funds to equities too, as the markets have corrected," said Zende, adding that rather than investing directly, they could consider hybrid or balanced advantage mutual funds. "They can look at allocating 10-20 percent of their investible surplus to these instruments, after assessing their risk-taking ability,” said Zende.

Dhawan echoed the sentiment. “They should look at taking some exposure to equities through hybrid funds and also large-cap and index funds,” he said.

Finally, senior citizens would do well not to get overly disturbed by the fall in interest rates. It is important to remain calm. Among the factors behind RBI’s decisions are the sharp fall in food inflation and improvement in headline inflation projections. “Inflation coming down would also mean their expenses will be contained. So, they will not be badly affected by lower rates. They should avoid panicking and overreacting in this situation,” said Dhawan.