17 Nov Bank FD Rate Set To Fall Further On Demonetisation. What An Investor Should Do?
Now with food prices falling and the demonetisation set to put further downward pressure on inflation, the consensus is building up for a 25-50 basis-point rate cut from the RBI soon.
The demonetisation of big currency notes will lead to more amounts being deposited in savings and current accounts of commercial banks. Some analysts estimate this figure to be around Rs 4 Lac Crore to Rs 5 Lac Crore.
However, this is bad news for fixed deposit investors. Higher bank deposits will put downward pressure on bank fixed deposit rates as credit growth in the economy is yet to pick up.
Now with food prices falling and the demonetisation of Rs. 500 and Rs. 1,000 bank notes set to put further downward pressure on inflation, the consensus is building up for a 25-50 basis-point rate cut from the Reserve Bank of India soon.
The RBI’s next policy meet is scheduled for December 7. With swelling deposits, banks are expected to pass on the central bank’s rate cuts sooner to the borrowers.
Data released on Tuesday showed the consumer inflation falling to a 14-month low in October.
“Inflation will decline further and touch 3.5% going ahead. The black money drive will increase the pace of deceleration, specifically in the services sector, which has lot of cash transactions,” SBI chief economist Soumya Kanti Ghosh said.
“I expect a rate cut in December and that won’t be the end of rate cuts,” he added.
Rajeev Malik, senior economist at CLSA, expects the RBI to cut Repo-Rate three times in the next 12 months, including one next month.
What should an investor do?
Expectations of lower inflation and a possible rate cut have already triggered a rally in the Indian debt markets, with bond yields falling to near eight-year lows.
According to Value Research data, the average return of debt mutual funds in debt funds (gilt medium and long term) has been in excess of over two per cent in the past one week, taking their yearly return around 15%. Analysts expect the rally in debt mutual funds to continue at least in the medium term.
Manoj Nagpal, CEO of Outlook Asia Capital, says conservative investors should lock into fixed deposit rates of higher maturity if they want a recurring monthly/annual income as interest rates are likely to fall further.
Alternatively, he suggests young investors to move to long-term debt mutual funds if they want to take benefit of the waning interest cycle. Debt or bond markets benefit from a downward trending interest rate cycle.
Mr. Nagpal also recommends senior citizens to get lock into higher rates provided by the Senior Citizen Savings Scheme, even though the interest rates in small savings schemes are likely to dip following an overall downward trend in the interest rate cycle. However, small savings schemes typically provide higher interest rates than bank deposits.
Vikram Dalal, managing director of Synergee Capital, says investors can also look at “tax-free bonds, which offer six per cent tax free return with no lock-in period (pre-tax return for 30% tax bracket investors will be nine per cent”.
Tax-free bonds were a huge hit among investors who looked for a steady tax-free interest income but this fiscal year, there would not be fresh issues of tax-free bonds. Since tax-free bonds are traded on exchanges, investors can buy them from secondary markets.
“While investing in tax-free bonds, one should consider tenure, rating and liquidity,” he adds.
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