When interest rates go up, you know one thing for sure – it will come down also. Now inflation figures are likely to be a little lower (base effect), and there will be pressure on RBI to cut rates. In the informal market (ask the builders!) interest rates are still hovering around the 25%p.a. + ……..and it is not showing any signs of coming down.

Many people including NRIs have locked in their money at these high rates and this is coupled with a dramatic fall in demand for loans.

Is this a time to be investing in long term bond funds (like Gilts?) or will the interest rates still go up?

I do not know. I also know that there are only 2 types of people – those who know that they do not know and those who do not know that they do not know.

The government has no capability to reduce expenses. The expenditure on defense, on insurgency, etc. are of course not controllable, but even the exp on the Nehru, Indira, Rajiv programs are not controllable. This will mean a tremendous amount of borrowing by the government. How can businesses compete in the world markets borrowing money at 12% p.a. beats me. Recently Tata capital has reduced interest rates from 12% to 10.5% – it will be interesting to see the response.  In a market when I can get a bond portfolio return of 10.5% coupon I will not want a concentrated risk even if it is Tatas.

I see builders willing to borrow at 28% p.a. and the less reputed ones even at rates north of that….

However if you are happy with a current yield of 10% and do not mind a short term fall in the value of the portfolio (and realise that you cannot catch tops and bottoms) it is not a bad idea to put some money in long funds.

Normally you turn to Dynamic Bond funds to see what is the fund manager view. Do not try to do that, the view is like a mess out there….and I have no phone number of a good debt fund manager with whom I can talk…sad but true.

 

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  1. Sir:

    Reduction in interest rates will give loan seekers some relief. Govt on one hand will reduce interest rates, on other they increase the registration charges. Some xyz charges will be included there by again making property prices more expsive to buy for common people.

    In city like bangalore, property prices are sky high. slight reduction in interest rate is not going to help. Over all out flow to buy home should reduce by 15% atleast.

    Regarding investment in funds to make money, i would wait and watch not make early commitment.

  2. The gross root effect may be debated but the move of RBI certainly caps the upword cycle which is a positive step for the ailing economy. We shoult not forget that no one was anticipating 50 bps cut and this came as real surprise.

    The existing borrowed community (home, builders) can take a sigh of relief that their EMIs would not further go up.

  3. Why are some recent GOI Bond issues devolving? Any ideas? Basically a devolved auction means RBI has to print money on Govt’s behalf, and that should be strictly forbidden in my opinion.
    In my humble opinion, RBI should let the yield go up till the point of zero devolving for each auction. Thereafter set the repo rate around the average yield. That way we are fair to Govt and private cos, and the repo rate actually becomes a fair benchmark for all other borrowers as well.
    Today the whole exercise is completely arbitrary, left to the whims of a few bureaucrats who take decisions based on numbers that get revised widely after a couple of months.

  4. @ LuckyOye

    Auction getting devolved does not lead to printing of money by RBI. It merely means primary dealers who had underwritten the auction will have to buy the devolved portion at the cut-off yield. Hence they have the option of charging higher underwriting fees for taking this risk in case they feel auction will not be subscribed at these levels.

    Secondly, repo/reverse repo rates are for overnight cash and setting them based on longer term security yields is not the right option.

  5. problem is debt build up and the view that real estate cant collapse in india .but it will and it could get nasty ..imagine 20% interest rates how many home owners will pay ,, so fdi wont help much

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