Fixed Deposit Interest and Debt Funds Yield will fall soon
- Base rate by RBI
- Demand and Supply of money (If there are enough takers for loan at higher interest rates, banks may be willing to give you higher Interest rates on Fixed Deposit). Currently, Banks are not finding enough takers for their loan and consequently they do not require FDs at higher rates.
- Other lending options for borrowers (With development of Bond market, corporates no longer solely rely on Banks).
Any Bank or Mutual Funds holds substantial amount of money in form of Government Securities as these are the most secured assets, and offers ready liquidity. Hence any surplus is parked into treasuries for gains. These government securities offers yields that are dependent on:
- Benchmark interest rates
- Liquidity Conditions
- Demand and supply
The RBI has drastically changed its stance on systemic liquidity and now wants to bring the banking system liquidity in the neutral zone from almost continuous deficit since mid-2010 — this is a big change in RBI’s stance. Until recently the deficit in Banking system was nearly Rs. 60,000 crore, thereby maintaining pressure on the yields and keeping it higher. However, with changed stance from RBI’s side, the non-transitory part of the liquidity deficit would be bridged through secondary market bond purchase under the open market operations (OMO).
In addition to the above, Government is pitching to rating agencies for Sovereign Rating Upgrade. If so called rating upgrade gets through or even if Rating agencies put India on rating watch-list, Bond market will factor the same and risk premium will come down thereby yields will fall.
So this could again be an opportunity to stay ahead of the curve, and start investing the money right now, rather than later as interest rates are about to fall. You can invest into:
- Fixed Deposit for longer duration to get maximum result for long
- Medium to long duration debt funds