On 4 Oct, RBI’s cuts the benchmark rates by 25 bps which results in bringing down the repo rate from 6.5% to 6.25%. The repo rate, the rate at which RBI lends money to commercial banks.
On one hand this would abring cheers on the face of the borrowers, because with the cuts there is pressure on the banks to transmit the benefit of the decrease to the borrowers, thereby decreasing their EMI. However, the investors would not be a happy lot. This is because due to the decrease in cost of borrowing from RBI, the banks would be looking forward to reducing the rates of interest on their saving schemes also. Historically it has been seen that this rate ‘transmission’ is faster as compared to the rate of interest on loans.
The Bank Deposit Rates would decline
The rate cut means deposit rates will decline - while some of the banks have already decreased their FD rates, for others the transmission will take sometime. The investors would have time or a limited window within which they can too lock-in the existing rates.
While there are alternates in small saving scheme like PPF, NSC, or Sukanya Samriddhi Yojana. Also there are caps of investments associated with each of them of upto Rs. 1 to 1.5 Lacs.
While no one would be able to predict if there would be another round of rate cut in December,
some strata of policy makers might look at another round especially if inflation targets are under control and stimulus still needed in the economic growth.
Alternative Investment Options
With the imminent fall in the bank rates, the retail investors can look at other options for investments:
With the retail investments reaching its highest level, mutual funds remains the flavour of the season for investments. The returns by the mutual funds, especially the small cap schemes has gone over 20% and the investments in these schemes do not seems to stop. Clearly this asset class should be the one where the highest percentage of your investable surplus should be allocated especially if you are between the age brackets of 20 to 55 years.
With the rate cuts the demand for bonds would increase; however the coupon rate or the newer bonds would be on a lower side. This is one of the safer bets that can be looked by the retail investors.
Peer to Peer Lending
Investors looking for relatively higher risk adjusted returns may also allocate some of their investable surplus to this asset class. With the returns starting at 18% and going upto 30%, this is one asset class which also provide monthly payouts in the form of EMI's and is not affected by the volatility of the market.
The rate of gold has decreased from its peak and hovering around Rs. 28,500; with ongoing festive season and upcoming wedding season this asset class would see a higher retail demand. The prices may increase giving decent returns to the retail investors. However, traditionally retail investors do not see gold as an asset bought to reap gains by buying and selling regularly.
Considering the above options while rate cuts seriously dent the income generation for retail investors there are multiple investment options available that can be looked depending on the risk appetite of the investors.
Source: Economic Times