FDs, FMPs may good option as inflation, IIP decline
The Reserve Bank of India's moves since the beginning of the
calendar year signal a soft interest rate scenario, but actual rate cuts
may be some time away. Inflation is still a concern. How does all this affect you as an
investor?
The Reserve Bank of India's (RBI's) moves since the beginning of the calendar year signal a soft interest rate scenario, but actual rate cuts may be some time away. Inflation is still a concern and industrial production declined in September. How does all this affect you as an investor?
The RBI has not reduced the key interest rates in the system citing inflationary pressure. It has also raised its target for Wholesale Price Index (WPI)-based inflation for 13 March 2012 to 7.5% from its previous estimate of 7%. Analysts say it could rise to 8% by the end of the year before moderating at 7.5% in March 2012.
Inflation has been on the rise for sometime now, inching upwards from 7% in March 2012 to about 7.8% in September 2012. The strengthening of the rupee in the past few months is likely to check inflation. The WPI has declined to 7.45% in October from 7.8% in the previous month. A relatively good monsoon might also keep prices under check.
"Falling core inflation on the back of slowing economic growth is likely to create space for the RBI to ease monetary policy in the early part of the next year", says Crisil. Analysts expect rates to ease by 0.50-0.75 percentage point in the current financial year. Hope for lower rates has already enthused the bond markets, with yield of 10-year government securities coming down to 8.1% in April-September, against 8.6% in 2011-12. Bond yield is inversely proportional to its price. Hence, a drop in yield increases bond prices and debt mutual funds' net asset values.
In the last one year, returns from long- and medium-term gilt funds have averaged 12%, followed by the 10.5% return delivered by income funds. While leaving repo rates unchanged may result in short-term pain for bonds, the long-term trend on yields remains on its southward trajectory. This is likely to benefit the two-five year segment.
"Investors seeking fixed income with a horizon of one year should look at long-duration funds", says Suyash Chaudhary, head of fixed income, IDFC Mutual Fund. You can opt for income or gilt funds. Rate cuts by banks are also a pointer to the imminent policy rate cut in the system. Hence, locking into fixed deposits and long-tenure fixed maturity plans may be a good option.
The RBI has not reduced the key interest rates in the system citing inflationary pressure. It has also raised its target for Wholesale Price Index (WPI)-based inflation for 13 March 2012 to 7.5% from its previous estimate of 7%. Analysts say it could rise to 8% by the end of the year before moderating at 7.5% in March 2012.
Inflation has been on the rise for sometime now, inching upwards from 7% in March 2012 to about 7.8% in September 2012. The strengthening of the rupee in the past few months is likely to check inflation. The WPI has declined to 7.45% in October from 7.8% in the previous month. A relatively good monsoon might also keep prices under check.
"Falling core inflation on the back of slowing economic growth is likely to create space for the RBI to ease monetary policy in the early part of the next year", says Crisil. Analysts expect rates to ease by 0.50-0.75 percentage point in the current financial year. Hope for lower rates has already enthused the bond markets, with yield of 10-year government securities coming down to 8.1% in April-September, against 8.6% in 2011-12. Bond yield is inversely proportional to its price. Hence, a drop in yield increases bond prices and debt mutual funds' net asset values.
In the last one year, returns from long- and medium-term gilt funds have averaged 12%, followed by the 10.5% return delivered by income funds. While leaving repo rates unchanged may result in short-term pain for bonds, the long-term trend on yields remains on its southward trajectory. This is likely to benefit the two-five year segment.
"Investors seeking fixed income with a horizon of one year should look at long-duration funds", says Suyash Chaudhary, head of fixed income, IDFC Mutual Fund. You can opt for income or gilt funds. Rate cuts by banks are also a pointer to the imminent policy rate cut in the system. Hence, locking into fixed deposits and long-tenure fixed maturity plans may be a good option.
