Fintotal News Analysis | Rates Get More 'Interest'ing Now
Rates Get More 'Interest'ing Now
Ruby Jacob, 28 Jul 2010

What's happening?

In a widely expected (and some would say belated) move, the Reserve Bank on 27 July 2010 raised the policy interest rates - called repo and reverse repo - by 0.25% and 0.50% points respectively. While these rates are a matter between other banks and the RBI, they do affect the interest rates that you and I see in the market on deposits and loans.

This is in response to inflationary pressures and a reasonably robust economic performance. 

What does it mean for me?

The good news is that deposit rates would rise, as would possibly the returns on debt mutual funds invested hereafter. These have been languishing at a lowly 5%-6% for debt mutual funds, and about 6%-6.5% for one-year fixed deposits of Nationalized Banks. Already, Banks are talking of increasing deposit rates by about 0.5% on an average. This could take effect as early as 1 August, or over the next couple of months.

The other side of the coin, of course, is that floating home loans could see a jump in EMI soon. But this is inevitable and is likely to be fairly uniform across Banks.

We do, however, foresee further rate hikes like this by the RBI later this year. After all, we are still fairlylow on the interest rate cycle (see Primer below for interest rate cycles and what they mean for you) and further increases to quell inflation cannot be ruled out. Keeping this in mind, you might not want to lock-in fixed deposits of tenure longer than six months or a year right now. That way, you will be better positioned to take advantage of the higher rates that are likely to prevail a few months later. Investors in debt mutual funds would also do well to continue avoiding the long duration variety

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