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RBI cuts repo rate & CRR: Invest in long term bond funds, lock in to higher tenure fixed deposits

ET Bureau Jan 29, 2013, 11.59AM IST
(If you are fixed deposit…)

MUMBAI: Reserve Bank of India has decided to bite the bullet and has reduced the repo rate and cash reserve ratio by 25 basis points each. Repo rate, the rate at which banks borrow from RBI, has been slashed by 25 basis points to 7.75%. RBI has also reduced cash reserve ratio, the portion of bank deposits bank keep with RBI, by 25 basis points, to 4%.

Cut in CRR will inject Rs 18,000 crore in the system. As RBI signals a fall in interest rates, and infuses liquidity in the financial system, the interest rates are expected to go down further. The 10 year yield has moved down from 8.15% as on 20 Jan 2012 to 7.87% as on 24 Jan 13. "the rate cut cycle has begun. We could see more cuts in the coming months," says Mahendra Kumar Jajoo, CIO, Fixed Income, Pramerica Mutual Fund.

"You should employ both accrual and duration strategies while building a fixed income portfolio. Investing in long term gilt and income funds make sense with a 12 to 24 months view," says Vishal Dhawan, CEO, Plan ahead Wealth Advisors. If you are fixed deposit investor, it makes sense to lock in your money at current rates in five year fixed deposits, if your cashflow permits. For example, IDBI Bank pays you 9% for a five year fixed deposit.

If you are an investor in higher income tax bracket, you can look at three year and five year fixed maturity plans.