RBI has increased the major policy rates twelve times since March 2010 to tame inflationary expectations. In this article, we are advising investors on what to do in a rising interest rate scenario.
FSM in Media:RBI Rate Hikes: Implications for Aam Janta
1. RBI Rate Hikes: Implications for Aam Janta
Author: Dr. Renu Pothen, Research Manager, Fundsupermart.com India
This article was published in Moneycontrol.com on Wednesday, 21 September 2011
The policy rates hikes by RBI have now become a non-event for markets, with both equity and debt
markets hardly reacting to the announcement. However, as far as retail investors are concerned, they
need to seriously plan their investments before the steam runs out. The Central Bank raised the Repo
rate by ~ 25 basis points on September 15 from 8% to 8.25%. In addition to this, Reverse Repo rate got
automatically adjusted to 7.25% and the marginal standing facility rate to 9.25%.
Thereafter, economists and experts are trying to read between the lines of the monetary policy review
released by the central bank to see if further rate hikes are in the pipeline. In such a scenario, two big
questions arise – “What is the impact of policy hikes on the economy?” and “How should investors play
the equity and debt market from here on?”
The Mid-quarter Monetary Policy Review remained very hawkish with the central bank continuing to
emphasise that inflation still remains a nightmare for policymakers. The data states, inflation which was
at 10.36% in March 2010 has reduced only to 9.78% as at August 2011.This clearly shows that the
continuous rate hikes which were carried out to combat the inflationary tendencies, have not been able
to tame the same even after 18 months. The tight monetary policy has had a negative impact on the
growth trajectory of the economy - the decelerating trend in GDP, corporate earnings, volatile IIP
numbers etc. are some of the effects. The man on the street has not been spared by the actions of the
central bank as the EMIs have increased and instead of inflation decreasing, the prices have only gone
through the roof. We are of the view that RBI cannot by itself control inflation, as inflationary
expectations are the result of both domestic and external factors. In the current scenario, global events
are certainly outside the purview of the central bank and even in the case of domestic factors, the
government needs to take appropriate actions to correct the demand-supply imbalances in managing
food inflation and cannot expect only the RBI to do the needful. RBI has made it very clear that the
future course of action will depend upon inflationary tendencies and global events. In short, we can
expect some more rate hikes in the current fiscal itself before the central bank presses a pause button.
As far as the fixed income side is concerned, in the current scenario, we continue to remain positive on
the FMP space as we believe that rate hikes are definitely in the pipeline and the liquidity situation in
the economy needs to improve, which provide an opportunity to invest in these kinds of instruments.
Investors who want to lock in money in instruments which provide higher post-tax returns than
traditional fixed deposits can consider the same without getting nightmares about the volatility in
interest rates. We also advise investors to look at short term funds and for those investors who have
parked idle money in savings accounts, ultra short term funds provide higher returns and tax benefits.
Hence, the shorter end of the curve still looks attractive and investors need to tap this opportunity.
2. On the equity side, we advise investors to enter markets and every dip should be used as an opportunity
to invest. We are of the view that if the global markets sneeze, India’s major index catches a cold. Thus,
more corrections are expected in the coming months. Investors can use the SIP/STP or lump sum route
to take an exposure to the domestic markets.
Plus, the uncertainties in the global economies should be looked upon as a good time to take an
exposure into these markets through the global funds route. Although the situation in the global
economies looks weak currently, we believe that an entry into these markets at these attractive
valuations will prove beneficial as we are expecting earnings of global markets to be at all-time high in
2013.
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