How you can strategise fixed-income investing- The New Indian Express

Express News Service

NEW DELHI:  Inflation is on the upswing, and the Reserve Bank of India (RBI) has given a clear signal that it now prioritizes inflation (control) over growth. This clearly means the Central Bank might be thinking of increasing interest rates.

Recently, group chief economic adviser of State Bank of India Dr Soumya Kanti Ghosh predicted that the RBI might hike the rate at which it lends to banks by at least 50 basis points by the beginning of June 2022. Also, yields on risk-free 10-year government bonds, which till recently were trading below 7% mark, have now touched 7.25% levels.

Given the fast-evolving situation, how should investors, who invest in fixed-income options like FDs, small savings schemes and debt mutual funds, make their investment strategies?

The key at this time for such investors is to avoid longer tenure products. Depositors should not get locked into any longer tenure FDs, while debt fund investors can invest in short-duration bonds which do not take unnecessary interest rate risks.

Bank depositors, small savings schemes
Banks are offering 5-5.5% on fixed deposits with 1-10 years tenure. They are fetching a negative real rate of interest if we consider the inflation prediction for 2022-23 at above 6%.

Bank fixed deposit rates are fetching lower interest rates because the banking system was flooded with easy cash thanks to several central bank measures to supply easy liquidity to banks so that they support businesses hit by the pandemic.

The RBI has been removing the extra liquidity from the system and as a consequence bank deposits rates should increase going forward. Investors planning to park their money in FDs should, therefore, do so in short tenure FDs for now, and wait for better rates in three-six months time.

Small savings schemes rates are linked to government bond yields of similar tenure, and they are revised every quarter. So, any increase in government bond yields should get reflected in the revised rates albeit…

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