Interest Rate Juggling
All expectation of the central bank looking to go easy on interest rates has gone with the wind.
India had the hottest February since 1901; that’s what the weather logbook records showed.
Adding fuel to the heat under the collar was also the cost of living, which continued to stay red hot in February.
The retail inflation rate in India, measured by the Consumer Price Index (CPI) at 6.44% in February, was a tad lower than 6.52% in January. It still continues to be obstinately higher than the Reserve Bank of India’s upper tolerance limit of 6%
Inflation is the rate at which prices of goods and services rise over time.
Why is inflation stubbornly high?
A key reason for inflation staying high continued to be a rise in prices of roti, kapda, aur makaan.
Prices of cereals, houses, clothing and footwear rose up to 1 percentage point in February.
Will prices continue to stay high?
Yes, they will stay high because there is still concern that the price of wheat will stay high.
A rise in temperatures does not bode well for the wheat crop. Prices of wheat reflected this worry and rose over 25% in February.
Inflation could cool down in March, not because of a fall in prices but because of the so-called base effect.
In essence, it means that compared with the 6.95% rise in March last year, which was a 17-month high, the rise in CPI this March is expected to be lower.
What else will keep rates high?
Adding pressure to interest rates is the government’s move to raise the interest rates for small savings schemes.
This is good news for those who deploy their savings into these instruments.
The rate for one-year postal savings fixed deposit was raised by 110 basis points or 1.1 percentage points, and only by 20 basis points for the five-year National Savings Certificate
What does this suggest?
It means that the outlook for long-term rates is stable and that its only short-term rates that are volatile.
What should you do?
Investors must selectively start buying long-term fixed-income securities such as corporate bonds or mutual funds that buy mid- to long-term bonds.
Of course, you may not always be able to get the highest-yielding bond or deposit.
But buying at various levels could ensure that you get better returns on average.
Do consult your financial advisor to decide on the best possible option that is aligned with your risk appetite and financial goals.
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