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Interest rates may be in flux, an investor need not be

Undoubtedly, the transition from the pandemic economy to the subsequent phase has been challenging and perplexing.

Apart from the compulsory wearing of masks, a key departure has been the rise in inflation and the consequent rise in interest rates.

Monthly mortgage payment amounts have ballooned, and one hears about the rising incidence of layoffs.

From the idea of a gig economy, working folks are scratching their heads to learn skills that will keep them employed and employable.

Banks are going bust in developed markets and there is talk that nothing is safe anymore.

So, does one leave cash under the mattress?

No, definitely no.

No Indian bank will go belly up as some of them did in the US or Europe, the RBI governor re-emphasized recently.

So that’s settled. The fixed deposits in Indian banks are safe.

Of course, up to a total of Rupee Five Lakhs per depositor per bank.

Interest rates in India have been raised by around 250 basis points in less than a year by the Reserve Bank of India.

They have now been paused as the central bank is evaluating the cumulative impact of the rate rise before deciding on the direction of interest rates.

The impact of a rise in interest rates tends to vary depending on the situation one is in.

If you are a borrower, the equated monthly installments on your home loan would have ballooned. You would have seen a rise in the rates from the car and personal loans.

But interest rates on your fixed deposits have not moved in tandem with the rise in loan rates.

That was because the banks had enough liquidity because of the so-called earlier “accommodative stance” of the RBI.

This stance was withdrawn in 2022 when the RBI started hiking rates.

And the effect of that withdrawal is felt only now.

For instance, look at the overnight, or call money, rate.

From an average of around 6.18% the call rate is now at around 7.21%.

This means deposit rates could rise, though a one-to-one correlation does not exist.

What should you do as an investor?

Invest now to take advantage of the current rates.Invest now to take advantage of the current rates.

Catching the top of the interest rate cycle, or the bottom is similar to timing the equities market.

Consider this.

While the RBI has said it will not raise rates, it has also said it does not mean an end to raise rates.

Why try to guess the mind of the RBI?

If central banks globally decide to continue with these existing rates for some more time, there is a possibility that rates offered on fixed deposits may not go up from here on.

In this case, you must lock in your investments at these current rates, which will give you the security of these assured higher returns.

Given that interest rates also tend to go through a cycle where they would see a rise and fall, it may appear that the prospects of interest rates going down from current levels are more.

Given that returns from equities have not exactly been top-of-the-table for some time now, investors may be scouting for investment options in other asset classes.

Debt investments at this point in the interest rate cycle could ensure higher steady returns over its tenure.

More importantly, it offers safety of your principal amount.

As the famed investor Warren Buffett says,” The first rule of an investment is don't lose [money]. And the second rule of an investment is don't forget the first rule. And that's all the rules there are.”

Investors must consult their financial advisor to select the investment opportunity based on their risk profile.

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