Stay Invested in Debt Options

     Print Edition: July 2012

The Reserve Bank of India's (RBI's) decision to hold the rate cuts for the time being may not bring the much-needed respite to retail borrowers in the immediate future, but investors in fixed-income instruments (fixed deposits and debt funds) can take advantage of the current situation by locking their investments in high-yield savings instruments.

Usually, banks cut their lending and deposit rates simultaneously to adjust interest rate margins. Similarly, with a fall in interest rates, bond prices go up, lowering their yields.

Both the situations are unfavourable for debt investors.

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"Since the RBI left both the cash reserve ratio (CRR) and policy rates unchanged, it is positive for debt investors," says Ganti Murthy, head, fixed income, Peerless Mutual Fund.

Murthy explains a CRR cut could have meant more cash in the hands of banks, thus, lowering their dependence on public deposits, which might have led to cut in deposit rates.

"No policy rate cut means bonds would continue to have higher yields for the time being," he adds.

Ten-year government bonds were trading at 8.34 per cent a session before the RBI policy review on 18 June 2012. Three-month and six-month treasury bills were trading over 8.1 per cent on the same day.

Retail borrowers may continue to pay higher interest on loans taken from banks, which are currently charging 11-12 per cent for home loans above Rs 30 lakh. The fixed-deposit rates are in the 9-10.5 per cent range.

The RBI's no-change stance against the widespread expectation of a rate cut triggered a sharp fall in the markets. "The equity markets, from a valuation perspective, are below the long-term average range and, hence, can be seen as offering a buying opportunity from a long-term perspective," says Sudhakar Shanbhag, chief investment officer, Kotak Mahindra Old Mutual Life Insurance.

G Chokkalingam, group chief investment officer, Centrum Wealth Management, says, "We firmly believe that any positive development-reform measures such as foreign investment in the retail sector, favourable development in Greece and normal monsoon-would more than mitigate any risk arising from the monetary policy."

Continued double-digit consumer price inflation and an increase in wholesale price index from 7.2 per cent in April to 7.6 per cent in May weighed on the RBI's decision to leave the rates unchanged.

Global rating agency Standard & Poor's (S&P) had warned India may lose investment grade if the government did not take steps to boost growth and curb fiscal deficit.

The central bank said that factors other than interest rates were responsible for the slowdown in the Indian economy. "Estimates suggest that real effective bank lending interest rates, though positive, remain comparatively lower than the levels seen during the high growth phase of 2003-08," it said.

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