by Vivek Karwa, CPFA., CFPCM
131220: This time RBI has surprised everyone by not raising the interest rates in spite of the inflation numbers rising beyond the comfort point. Infact the RBI has given out statements which have confused most of the investors. RBI governor Raghuram Rajan speeches have ended up making some believe that rates will go up in next policy review and some are still assuming that he has said that the uptrend may not resume.
Though the inflation numbers have gone up and though the governor spoke tough words on inflation, yet the rates were not hiked. Mr.Rajan knows that hiking any rates now would just further choke the cash strapped corporate world. Most of the inflation is now driven by other factors than the actual consumption. The demand-supply mismatch of food products has caused lot of hardship and further we are also dealing with the problem of imported inflation as the Indian currency is not moving below the 62 mark against the dollar. The RBI also knows that very little would now happen on the policy front until the next government is formed in 2014.
Hence increasing the rates would have not helped much, but harmed more. The love which the market had shown for the governor is all over now. Don’t expect him to steeply reduce rates. A max 25 bps can be expected during the next policy review. Situation would improve when the short term rates and the long term rates fall back to the normal yield curve.
So what should investors be doing going into the new year 2014?
This is indeed good time for those people wanting to invest for safety as priority to get locked into the debt market right now through the Fixed Deposits, Company Deposits, Bonds or Debt Funds. So if you are a retired person or a person who cannot digest any risk then the current offerings are giving you inflation adjusted marginally higher real return. There are good companies which are offering upto 11% yield on the deposits.
Those who can take just a few percentage points risk can choose Bonds and Debt Funds. If in case, the inflation starts coming down in next 12 to 24 months and the RBI also softens the higher rates regime, the bonds and debt funds may also give you capital gains over and above the interest amount. Hence it would be wise to lock yourself in medium term papers of 2 to 3 years horizon to reap the full benefit.
What if you are a person who is ready to take risk and is willing to wait for medium to long term?
You should surely in this case be invested in the equities market. The market has seen the worse and may stabilize here even if similar policy paralyzed set up takes over. In case the elections show up results as per poll projections then expect market to handsomely reward you for your faith of staying invested in equities. Just resolve three things this new year! Will not buy anything without doing proper homework, Will take advise if I don’t know how to analyze, will invest through mutual funds if I have no time to do both the above.
Disclosure:- It is safe to assume that the author may have interest in the sectors recommended in this news letter. Seeking personal advice from your Financial Advisor is recommended before acting on any of the substance given herein. The numbers, figures, etc., presented may have been taken from various sources.
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