Dr. Sanjiv Agarwal

Reserve Bank of India shall come out with its credit policy review next week in the back drop of two important landmarks – growth in industrial output and decline in inflation, more so in food commodities. This is indeed a reversal from a long trend of unabated inflation. Interest rates have been rising for the last twenty months as the RBI wanted to curb the inflation. While increased interest rates made the loans dearer and hiked the cost of service and output, investors in debt funds and other fixed income securities continued to earn relatively better than in stock or  equity investments.

The major stock index, BSE sensex which was at 21000 points in November 2010 was at just above 15000 at 2011 and indicating that investors lost about quarter of their investments in last one year. Global uncertainly, economic slow down, lull in capital markets and absence of economic reforms – all led to a week capital market in recent part. Even today, the market is looking for stable revival, both in primary market and secondary market. Investors today are just following a wait and watch policy as markets are riding the uncertainly wave. In domestic market, this could revive if reforms take a U-turn in terms of pace and priority. Also, once the interest rates start falling, the investors may return to stock market.

If one believes in the theory that interest rates have peaked out and that the forth coming credit policy hints at easing out of interest rates, next 8-10 days is the most appropriate time to invest in  interest bearing securities, bonds, liquid mutual funds and other fixed income securities. Gilt funds and liquid funds are all set to gain as the reversal of interest rate cycle becomes eminent. Investors have already shown interest in such funds as in December 2011, debt funds and gilt funds saw highest net inflows. We may even have more new gilt funds which primarily invest in money market viz, T bills, government securities etc. These funds carry no credit risk and on interest rate reversal, gilt funds will become attractive in terms of market prices.

The falling interest rates will also be beneficial to investors as it would result in lower cost of production, increased productivity, more demand and there fore more output. It could also revive consumer goods and real estate sector as it would boost the demand.

2012 has started on a positive note and there are all good news around – be it moody’s upgrade of country rating, inflation or tax collection. Investors may continue to hold on to their portfolio with fresh investment in promising stocks or sectors matching their risk profile, besides having reasonable chunk of fixed income securities.

More Under Finance

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

September 2021