The year 2025 is expected to see heightened interest in fixed-income investments as the Reserve Bank of India (RBI) is anticipated to initiate a cycle of interest rate cuts. With equity markets consolidating, investors are likely to pivot toward fixed-income options to diversify their portfolios and secure stable returns, experts say.
Though the much-anticipated rate cut cycle may face delays, the RBI is expected to reduce interest rates in phases during 2025. A potential 100-basis-point cut could impact fixed deposit (FD) rates, small savings schemes, and bond yields. Existing bonds with higher coupons are likely to trade at a premium, while fresh bond issuances may carry lower coupon rates.
Investment opportunities
Investors looking to benefit from current rates before cuts take effect are advised to lock in their funds in fixed-income instruments such as bank FDs and AAA-rated corporate FDs. Corporate FDs, offering interest rates between 8% and 8.5% per annum, present attractive options but may carry penalties for premature withdrawal. Diversification across instruments, including corporate bonds rated AA or higher, is recommended. To mitigate risk, exposure to a single issuer should be limited to 10% of the fixed-income portfolio.
For senior citizens, the Senior Citizens Savings Scheme (SCSS) offers a compelling option with 8.2% interest and a five-year lock-in period. With a sovereign guarantee and a maximum investment cap of Rs 30 lakh per person, it remains a reliable choice for securing steady returns.
Non-senior citizens in higher tax brackets can explore small savings schemes like the Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY), which combine tax advantages with attractive interest rates. Instruments like the National Savings Certificate (7.7% interest) and Postal Monthly Income Scheme (7.4% interest) are well-suited for individuals in lower tax brackets.
With rates likely to decline, floating-rate instruments such as RBI Floating Rate Savings Bonds may lose their appeal despite their current yield of 8.05%. Instead, investors can consider sovereign-backed government securities via the RBI Retail Direct platform, choosing maturities aligned with their investment horizons.
Fixed-income investors are advised to balance safety, liquidity, and income when constructing their portfolios. Lock-in periods associated with instruments like small savings schemes and RBI bonds necessitate careful planning for liquidity needs. Diversifying investments across products ensures flexibility and mitigates risks associated with rate fluctuations.
