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RBI cuts rates

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We have seen that the fixed deposit rates have been falling since past two years and it is expected that they will fall further. The new RBI chief, Urjit Patel making a 25 basis point cut in repo in his first monetary policy.

The RBI has risen on expectations that inflation may come down in coming months and may help in further rate cuts. Recently the savings rates were cut down and it may pressure banks to lower deposit rates.

ICRA has issued a note in which it said that the repo cut along with the modest reduction in various small savings rates, would nudge banks to lower their deposit and, in turn lending rates.

Since January 2015 the RBI has in total reduced rate by 175 basis points and the biggest lender State Bank of India has lowered its one year FD rate by 135 basis points during the period.

These rate cuts by RBI have proved beneficial for those who have invested in mutual funds, particularly in long term corporate and government bonds. So Instead of investing in FD you should go for mutual funds as there you will get more benefits as compared to keeping money in the FD account.

According to a research, the average annual return in mutual funds in government bonds is 12.5 % in the past one year and 12.2 % in past 3 years and the dynamic bond category has given return of 11% in the past 3 years.

Some analyst feels that the rally in debt markets will further extend if RBI rate cuts and with foreign inflows into Indian debt markets.

One thing is sure that bond rates and interest rates are inversely correlated, means that when the rates fall bond prices of debt mutual funds go up. The tax factor also plays a major role apart from falling interest rates and that is why financial planners suggest opting for systematic withdrawal plans in debt mutual funds.