In this Investor Education Originals video, we’ll learn about the impact of the RBI rate hike.
RBI recently hiked repo rates, but how will it affect your investments? Let's learn that in today's video.
Why the rates are rising
The rates have been lower for a long time. Now that the economic growth is struggling and oil prices are on the higher side, the inflation rate is also rising. And when that happens, RBI tries to control it with rate hikes so that less money is chasing more goods and prices go down.
Now let's see how different investment avenues are affected by this.
1. Fixed Deposits
Ideally, when RBI hikes interest rates, banks increase their FD rates. You'll also observe that banks increase their lending rates immediately after the rate hike alert, but its transmission towards deposit rates takes time. But be assured, the FD rates will go up in the near future from the current levels.
2. Debt Mutual funds
When we are headed into a rising interest rate regime, debt mutual funds become attractive. But not all debt MFs are attractive; long-duration funds like gilt funds can get negatively impacted. So better stick to funds in the short-term category of debt funds. You can focus on the average maturity of 3 years.
3. Equity mutual funds/stocks
Equity funds turn volatile in a rising rate regime, so rate hikes don't have a positive impact on the stock market. Why? Because the borrowing costs for corporates increases. The interest rates on both existing and fresh loans increase so profit margins reduce.
Secondly, when instruments such as FD and debt mutual funds give good returns the equity inflows decrease. That's why in the rising interest scenario, you should invest in companies with zero to nil debt, attractive dividend yields, and which can easily pass on the rate hike impact to consumers in terms of high prices. For example, the FMCG sector.
4. Small savings schemes
The interest on small savings schemes such as EPF, PPF, or senior citizen savings schemes increases when the interest rates rise. Small savings scheme rates are reviewed every quarter.
Start your investing journey on Kuvera - your safe space to invest. Click on the link below to get started.
[ Ссылка ]
