In an aggressive monetary policy announcement, the RBI hiked the repo rate the rate at which the RBI lends money to banks, by 0.25 % (25 basis points) from 5.75% to 6 % and the reverse repo rate, the rate at which RBI borrows money from bank by 0.50 % (50 basis points) from 4.50% to 5 %.

We monitored the impact on deposit rates offered by various banks for a couple of weeks. Many big banks, like SBI, PNB, BOI and CBI increased their deposit rates. Interest rates on deposits are increased by 0.25 % to 1.00 %. This will benefit the group that lives on fixed interest income.

What were the probable reasons for this interest rates hike by RBI?

1.    Inflation in India is in double digit and rate hike is one of the better tools to curb inflation.
2.    Food inflation is at level above 15 % for long time now. RBI is looking to reign in inflation.
3.    For next round of economic growth, banks need to gear up for credit demand growth.
4.    There may be a feeling that banks have lower deposits in comparison to their lending portfolio so banks should increase their deposit base.
5.    Real interest rate (nominal interest rate minus inflation rate) is negative for long time in India which may result into discouraging borrowing and increasing speculation.  

Impacts of interest rates increase by RBI.

1.    Increase in deposit rates; people will get better return on their savings.
2.    Exiting loan rates may go up hence it will impact household expenditure and savings.
3.    New retail loan rates will go up and it may impact on the demand of the loan and commodity.
4.    This may curb inflation and makes economical environment better.
5.    It will make more funds available for banks to meet the increasing credit demand.
6.    With interest rates going up, manufacturer may get another reason to hike the prices of goods which may have negative impact on savings.

Based on past experiences, we can expect this upward trajectory of interest rates to continue. So what does this mean for you; how do you cash in on the hiked rate? What are your best investment options?

Here are few investment strategies for fixed income.

1.    If you currently hold investment in fixed income securities, you may like to stay invested for 1 or 2 quarters and see the best possible option.
2.    If you wish to move your money to fixed income securities from other investment, you should compare the expected returns of both options. In short term, your existing investment may earn higher. You may like to wait for best fixed income option as your long term investment strategy.
3.    If you have cash on hand and want to move to fixed income securities, you can think about investing in short term for few quarters. This will give you opportunity to relook at investment options in future and opt for the best one for medium to long term.
4.    There is another investment option to go for debt mutual fund. In such mutual funds, you have high liquidity and tax free dividend where your yield can be higher than other options.

Ketul H Shah is a Chartered Accountant and an MBA. He has specialized in banking, finance and insurance.
Ketul maintains a blog on www.askketul.com
 

   
 

e-mail: Ketul Shah

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