Impact of Rate cut..

The RBI, after a long hiatus, finally cut rates for a change. Over the last 18 months, interest rates have been increased 13 times in a row. The new year came with some good news on the monetary front. The rate cut of 50 bps (from 6% to 5.5%) on CRR (Cash Reserve Ratio) was a welcome change - CRR is the percentage of bank deposit that lenders have to keep with the RBI and this reduction is expected to inject Rs. 32,000 crore liquidity into the economy.. The cut in CRR is seen as a first step towards softening inflation substantially. In addition to this, the lending rates on Home loans, auto loans and personal loans etc would also come down.

The rate cut logic

Even given that it would not be an unmixed blessing, the rate cut was predominantly mooted due to the stress that it laid on the economic growth. There have been repeated revisions in the GDP guidance and negative sentiments on growth prospects in the economy. The rates cuts have been triggered with the motive to rein in inflation, maintain the GDP growth at decent levels and improve sentiments in the economy.

Post the interest rate cut it is anticipated that there would be lowering in interest rates on loans – retail / corporate alike. It is also expected that the banks would use the additional liquidity to lend more money thereby creating a robust economic environment which will in turn help boost GDP growth.

Fixed Deposits / Bonds – riding the wave

Fixed income instruments became popular with every upward revision of interest rates, but now given that there is not that much of a dearth of liquidity in the economy; the prevailing high interest rates are likely to drop a notch lower. In no time, the interest rates on long term fixed deposits and bonds can moderate. For those who have been prudent to lock-in the prevailing interest rates, it is time to feel proud about yourself. For those who lost out on this opportunity, better late than never is what we have to say!

Outlook

The rate cut brought great relief to the economy, the investor sentiment and consumer confidence has been restored to some extent atleast. There are telling signs of inflation softening, and this should eventually rub off on the borrowing rates as well. For the fixed income investor, there is still time to lock in the higher interest rates, in the future over a 6-12 month period rates are likely to come off more sharply.

Source-:

Anil rego, CEO Right Horizons

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Financial Chronicle