(This story originally appeared in on Oct 10, 2019)

MUMBAI: Senior citizens and retirees who primarily depend on income from fixed deposits in banks, may soon need to look at shifting part of their life’s savings into debt mutual funds.On Wednesday, along with a cut in lending rates, banking major State Bank of India ( SBI ) also cut the FD rates for senior citizens for 1-2 years bracket to 6.9% from 7% while savings bank rate was cut to 3.25% from 3.5% for deposits of up to Rs 1 lakh. Other banks are expected to follow.Thanks to the Reserve Bank of India (RBI), banks have moved to an external benchmark — the repo rate that is variable — to fix interest rates for their borrowers. With the lending rate being marked to a variable rate, now it’s almost a given that the rate of interest on deposits will also be linked to the same variable benchmark.In a scenario where interest rates are declining, when RBI cuts repo rate to spur growth, FD rates are bound to fall, hurting those senior citizens and retirees dependent on FD income to meet their financial needs.There are about 4.1 crore senior citizen FD accounts with about 14 lakh crore in aggregate in them, according to an SBI report.In such a scenario, say financial planners, senior citizens will have to take some risks and invest in marked-to-market products like debt funds. Alternately, the government has to step in to help senior citizens through tax concessions on the senior citizen savings scheme (SCSS) in which up to Rs 15 lakh could be parked by each individual of above 60 years, a report by SBI said.Post SBI’s cut, yield on an FD of Rs 50 lakh translates to a reduction in yearly income by Rs 5,000. SBI said that the rates have been cut ‘given the surplus liquidity in the system’.According to an SBI report, it is estimated that currently there are about 4.1 crore senior citizen FD accounts with about Rs 14 lakh crore in aggregate parked in them. All this money could be hit when these FDs are renewed at a lower rate.Speaking to TOI, Rajkiran Rai, MD, Union Bank of India, said: “Historically, inflation has been high at over 5%, which is why people are accustomed to 8% on fixed deposits. Now inflation is below 4% and deposit rates are in the range of 6-7% which means that real interest rates have not moved much,” he said.The move to sub-6% FD rates, however, looks inevitable. “Eventually, banks will have to move to a floating rate regime but in the short term the move will face a lot of resistance from depositors as they are not used to floating rate deposits,” said Gajendra Kothari, managing director & CEO, Etica Wealth Management. When it comes to the need to maintain the same lifestyle while income from FDs is falling, investors could look at highly rated corporate FDs which are at least as good as the banks where the FDs were, said Surya Bhatia, managing partner, Asset Managers, a Delhi-based financial advisory outfit.