FSM in Media:RBI Rate Hikes: Implications for Aam Janta
RBI Rate Hikes: Implications for Aam JantaAuthor: Dr. Renu Pothen, Research Manager, Fundsupermart.com IndiaThis article was published in Moneycontrol.com on Wednesday, 21 September 2011The policy rates hikes by RBI have now become a non-event for markets, with both equity and debtmarkets hardly reacting to the announcement. However, as far as retail investors are concerned, theyneed to seriously plan their investments before the steam runs out. The Central Bank raised the Reporate by ~ 25 basis points on September 15 from 8% to 8.25%. In addition to this, Reverse Repo rate gotautomatically adjusted to 7.25% and the marginal standing facility rate to 9.25%.Thereafter, economists and experts are trying to read between the lines of the monetary policy reviewreleased by the central bank to see if further rate hikes are in the pipeline. In such a scenario, two bigquestions arise – “What is the impact of policy hikes on the economy?” and “How should investors playthe equity and debt market from here on?”The Mid-quarter Monetary Policy Review remained very hawkish with the central bank continuing toemphasise that inflation still remains a nightmare for policymakers. The data states, inflation which wasat 10.36% in March 2010 has reduced only to 9.78% as at August 2011.This clearly shows that thecontinuous rate hikes which were carried out to combat the inflationary tendencies, have not been ableto tame the same even after 18 months. The tight monetary policy has had a negative impact on thegrowth trajectory of the economy - the decelerating trend in GDP, corporate earnings, volatile IIPnumbers etc. are some of the effects. The man on the street has not been spared by the actions of thecentral bank as the EMIs have increased and instead of inflation decreasing, the prices have only gonethrough the roof. We are of the view that RBI cannot by itself control inflation, as inflationaryexpectations are the result of both domestic and external factors. In the current scenario, global eventsare certainly outside the purview of the central bank and even in the case of domestic factors, thegovernment needs to take appropriate actions to correct the demand-supply imbalances in managingfood inflation and cannot expect only the RBI to do the needful. RBI has made it very clear that thefuture course of action will depend upon inflationary tendencies and global events. In short, we canexpect some more rate hikes in the current fiscal itself before the central bank presses a pause button.As far as the fixed income side is concerned, in the current scenario, we continue to remain positive onthe FMP space as we believe that rate hikes are definitely in the pipeline and the liquidity situation inthe economy needs to improve, which provide an opportunity to invest in these kinds of instruments.Investors who want to lock in money in instruments which provide higher post-tax returns thantraditional fixed deposits can consider the same without getting nightmares about the volatility ininterest rates. We also advise investors to look at short term funds and for those investors who haveparked idle money in savings accounts, ultra short term funds provide higher returns and tax benefits.Hence, the shorter end of the curve still looks attractive and investors need to tap this opportunity.
On the equity side, we advise investors to enter markets and every dip should be used as an opportunityto invest. We are of the view that if the global markets sneeze, India’s major index catches a cold. Thus,more corrections are expected in the coming months. Investors can use the SIP/STP or lump sum routeto take an exposure to the domestic markets.Plus, the uncertainties in the global economies should be looked upon as a good time to take anexposure into these markets through the global funds route. Although the situation in the globaleconomies looks weak currently, we believe that an entry into these markets at these attractivevaluations will prove beneficial as we are expecting earnings of global markets to be at all-time high in2013. Powered by Launched in 2000, Fundsupermart.com is one of the largest online distributors of mutual funds in South East Asia, with regional presence in Singapore, Hong Kong, Malaysia, and now, India. www.fundsupermart.co.in is the online mutual fund information and transaction site for self-directed investors and is part of iFAST Financial India Private Limited. It is a single point destination for investing in Mutual Funds with Free account opening, Easy transacting, Zero transaction and maintenance fees, Research articles, Recommended Funds & Portfolios, Fund Manager Interviews, FSM School carrying basic articles/videos for novice investors and more! iFAST Financial India Private Limited is an AMFI registered mutual fund distributor (ARN – 67218). Visit www.ifastcorp.com to know more about the parent company. DISCLAIMER iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual funds offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice.