Smart moves in a falling interest rate regime

In their first policy review, the new Reserve Bank of India (RBI) governor and the Monetary Policy Committee (MPC) debuted with a repo rate cut of 25 basis points (bps), bringing it down to 6.25 per cent. While fixed-income investors stand to lose from falling interest rates, borrowers stand to gain. Both need to realign their strategies to make the most of this low rate environment.

One more rate cut, perhaps

Experts say rates may soften a little more. "RBI is comfortable with an inflation range of four to six per cent. India is experiencing significant disinflation, with further disinflation possible in pulses. The next few inflation readings may print significantly lower than the RBI's suggested inflation trajectory.

The majority view is that we may now be close to the end of the rate cut cycle. Only a few believe that interest rates are headed structurally downward, allowing for further rate cuts of 100-125 bps over the next 18 months.

Fixed deposits

Fixed-income investors should invest in products that match their risk profile. "When rates begin to fall, investors typically begin to invest in products that are too risky for their profile.

Investors in the highest tax bracket looking to lock into current rates for the long term may buy tax-free bonds from the secondary market. These offer a yield-to-maturity of 6.25-6.35 per cent. Those in the lower tax brackets may bet on highly-rated corporate deposits.

Shift to lower rates

(Home Loan Offers) Interest rates on home loans have come down by around 50 bps since the beginning of the year, with the best rate available declining to 9.25 per cent. If banks decide to pass on a greater portion of the fall in interest rates to customers, home loan rates could fall further.

While new borrowers get the benefit of the latest rates, older borrowers could still be stuck at higher levels, especially if they had borrowed under a different regime, say, base-rate linked, instead of MCLR-linked.

[Source: http://www.business-standard.com/article/pf/smart-moves-in-a-falling-interest-rate-regime-116101200927_1.html]