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Rate hike may affect debt MFs
Published on 6 Jul. 2010 11:43 PM IST
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: The 25-basis point (100 basis point = 1%) hike in policy rates by RBI last week was a non-event for many individuals. But will they be as lucky when the banking regulator hikes rates again, as is widely expected, in its next policy review due in another three weeks? Many financial experts who believe the apex bank would hike repo and reverse repo rates by another 25 bps are of the opinion that individuals may see deposit and lending rates inching up soon.
They also want investors to be cautious about their investments in debt mutual fund schemes which may be hit by increasing interest rates in the economy. The NAV of debt MFs fall in a rising interest rate regime because of the inverse relationship between price and interest rates.
“The broad trend indicates that RBI would keep hiking its rates from time to time, and interest rates are set to rise. It is another matter that these measures are not helping to rein in inflation which will go up further because of the recent fuel hike. It will have a ripple effect in the economy and another hike of 25 or 50 basis point hike looks possible,” says Suresh Sadagopan, chief financial planner, Ladder 7 Financial Advisories, a wealth management firm.
“If the trend continues, there will definitely be hikes in bank deposit and lending rates. Of course, there will be some lag between the RBI measures and banks’ actions but there is certainly a strong correlation between them,” he adds.
On one hand, be ready to pay more for loans, while you can also pocket some extra percentage on your fixed deposits with the banks. Financial experts believe that banks don’t have much of a choice other than hiking deposit rates because of high inflation. It is another matter though whether they will rush to revise their lending rates upwards since the liquidity situation in the banking system is comfortable and demand for funds from companies is still not robust.
As for investors, financial experts believe that the equity market may continue to perform relatively well despite the hike in rates, which could squeeze the profit margins of companies. As for the debt part of the portfolio in mutual funds, experts warn that the rising rates may have an adverse impact on the performance of long-term debt schemes.

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