Are interest rates headed up?

by Manshu on May 8, 2012

in Opinion

I got an email from someone who asked if NRE interest rates are likely to go up in the future and that really surprised me. For more than a year now people have been leaving comments here saying that interest rates have peaked and they can’t go any higher, and you should make hay while the sun shines and invest in fixed income instruments as soon as you can.

By and large that has been true as there have been some really good yields available to investors all of last year and continues to be available even now. What has not been true is the expectation that interest rates will come down.

When RBI revised the Repo rate last time, I thought that might prompt banks to lower rates more than they actually did. In many cases banks kept their highest interest rates still available but at a shorter maturity and I think in one or two cases banks haven’t reduced the rates at all.

Given that the RBI has said they are in no hurry to reduce rates further and how nothing indicates that the macro economic environment of relatively high inflation and high government borrowings will moderate – I think it’s safe to assume that interest rates will hover around these levels for a few more months.

But I don’t really see how there could be a big spike in interest rates in the next few months, and I wouldn’t wait to make a fixed deposit in the hopes of getting a higher rate. While you may get 25 or 50 basis points more – I don’t think it is wise to wait because the rates may as well come down from here.

If you want to invest in fixed income, there are good options right now in terms of tax free bonds, fixed deposits and there are quite a few FMPs that get announced every other week or so.

I don’t see any good reason to wait, do you?

{ 11 comments… read them below or add one }

Jitendra P.S.Solanki May 8, 2012 at 10:13 am

Hi Manshu,

Yes, you are getting good yields in fixed income products at present.RBI statement was in line with reviewing situation for inflation.Even if rates heardened for a quarter or two it will come at same level as was before the cut.Since not much rate cut happened from the banks after RBI reduced rates this April, there will not be heavy increase in rates.Look at other side if rates decrease from here then we can see drop in interest rates missing out opportunities from fixed income at moment.Hence this may be a good time to block money in these instruments to earn the desired rates.

Reply

Manshu May 8, 2012 at 6:18 pm

Thanks for your thoughts Jitendra, and what are your views as far as long term or short term instruments are concerned. Is it better to lock in a high rate for a longer duration at this point or just shorter duration is fine?

Thanks!

Reply

Jitendra P.S.Solanki May 8, 2012 at 10:13 pm

Manhsu,

Its good time for long term funds.10 year yield is already more than 8.5% and do not see it coming down atleast in thsi quarter.However, do not expect it to rise much higher from here.Hence, it might be you can say a peak from where going ahead interest rates will fall.In short term interest rates can heardened for a quarter or two if inflation doesn’t get in control.Then you may see some returns from these funds.But if it remains stable then returns will be lower.Hence in all situations, income or gilt funds are a good bet if someone has a horizon of 2-3 years.do not expect repeat performance from liquid funds.I would suggest someone who has already receive returns from short term to exit at this point now.Good time to lock in funds in FMPs as yield may fall going ahead. If someone want to enter short term then take bet from Dynamic Bond funds.

Reply

Manshu May 9, 2012 at 12:38 am

Thanks Jitendra.

Reply

Jitendra P.S.Solanki May 8, 2012 at 10:17 am

Hi,

Wrote a write up on Dynamic Bond Funds – a category from debt mutual funds performing good and FMPs..Readers will find it useful..

http://www.yourpocketmoney.com/2012/05/dynamic-bond-funds-they-work-in-dynamic.html

http://www.moneycontrol.com/news/mf-experts/why-fixed-maturity-plansso-popular-among-investors_699487.html

Reply

Manshu May 8, 2012 at 6:17 pm

Great links, thanks for sharing, I think I’ll use one for my weekend links also.

Reply

Raja May 8, 2012 at 5:48 pm

Oil subsidy cut. decreasing forex. fii withdrawals. don’t expect interest rate cut but prepared for mega inflation. rates will not go down as people expecting. t.hey will remain firm now and in coming years.

Reply

Manshu May 8, 2012 at 6:15 pm

I think one way of overcoming inflation is to allow FDI in multi brand retail and let foreign players come in. There is no way the current infrastructure can be improved without external capital and expertise. This of course is a long term solution as nothing can change overnight.

Reply

Paresh May 9, 2012 at 12:40 pm

I think the person who have mailed you may have referred to “Foreign Currency Non-Resident Deposits(FCNR)..” as RBI have raised the interest rate ceiling on NRI deposits in foreign currencies by up to 3%..

Reply

Manshu May 9, 2012 at 6:40 pm

That’s a good point Paresh and that may have just been his intention although he clearly stated NRE I think. But good point, thanks for bringing it up.

Reply

Lien May 20, 2012 at 8:20 pm

Hi Folks
I would like to enquire whether is it possible for a foreigner like me to invest in indian market, and enjoy the attractive interest rates? What are the methods required e.g open a bank account etc. Thanks for the time!

Reply

Leave a Comment

Previous post:

Next post: