In the last month, a lot has changed for fixed-income investors. Before the RBI’s meeting in April, data supported a shallow rate-cut cycle. However, the latest data points and commentary from the RBI leave room for interest rates to go lower. Let’s take a quick look at what’s driving interest rates down.
Inflation
Inflation has been one of the biggest constraints in taking policy rates lower. A sudden spike in food inflation last year kept the RBI on a neutral track watching out for risks to both growth and inflation. With a productive harvest season behind us and a promising monsoon ahead of us, we are past the worst of food inflation.
Growth Expectations
Uncertain trade policy is playing spoilsport on the global growth front. While India seems to be on a better wicket, a global slowdown could cascade into a domestic one. The IMF and the RBI have lowered India’s growth expectations accounting for global risks.
The RBI MPC
Compared to a year ago, the context and the committee have changed. This committee’s priority is to foster growth rather than to contain inflation. The February policy marked a decisive rate cut. The April policy delivered a stance change and a rate cut. The RBI’s accommodative stance takes rate hikes out of the picture. There is more policy room for rate cuts and this cycle could be deeper than expected.
Risk Management & Investment Strategy
The interest rate cycle is turning. Last month we talked about how to invest in falling interest rates. Now, all major banks have slashed their savings bank rates to 2.75%. Fixed deposit returns are next in line. Are you worried about making decent returns from safe instruments? We’ve got you covered!
