The
Reserve Bank of India (RBI) raised benchmark rates thirteen times since March
2010, only to reduce them in April 2012. Consequently, speculation is rife among
the economists that RBI may cut REPO rates (rate at which banks borrow from
RBI) and Reverse REPO rates by 25bps in its monetary policy review meeting in
January 2013.
Hence,
the returns a retail investor generates out of his investment portfolio is a
function of the prevailing interest rate and are well advised to be abreast
with the interest rate fluctuations and monetary policy statements by RBI.
As
a retail investor, let us broadly examine the repercussions of interest rate
fluctuations. The interest rates prevailing in the economy have the following impacts
on a retail investor:
a.
EMIs we pay, will be in direct proportion to the RBI’s bench
mark rates.
b.
Returns that we generate on our small savings, will be in direct
proportion to the RBI’s bench mark rates.
c.
Prices we pay for commodities (Demand & supply will have
a major bearing) will be in inverse proportion to the RBI’s bench mark rates and
d.
The yields we generate on our fixed income portfolio, debt
market and stock market performance. The chart below illustrates the bond yield
and stock market dynamics surrounding changing interest rates.
