EFFECT OF INDIA'S CENTRAL BANK RATES ON RETAIL INVESTORS

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.   

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.

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.