Fixed Deposit Interest and Debt Funds Yield will fall soon – Fincare Services

Fixed Deposit Interest and Debt Funds Yield will fall soon

Fixed Deposit Interest and Debt Funds Yield will fall soon
We have witnessed falling interest rates for past 2 years. Back in 2013-14, benchmark interest rates stood at 8%, thereby Fixed Deposit and Yield on Debt Mutual Funds were well near 9% or above. Since then RBI Governor took chair in took charge and placed watchful eyes on Inflation, over Inflation has come down from over 10% to 5% recently. However, with falling inflation, calls for interest rates cut to bolster growth have become louder.
RBI has cut interest rates by 150 bps since last year and it currently stands at 6.5%. Hence it is the lowest rate since 2011. Further, there are some important developments which has made Interest Rate for investors to go down.
Interest paid by Banks to the Fixed Deposit holder is cost to the Bank. Hence, Bank would look at reducing its cost and increase the lending rate to boost profit margin. However, factors play role in it are:
  • 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

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