Why the RBI repo rate cut is bad news for retired folk?

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 Why the RBI repo rate cut is bad news for retired folk?
The RBI today cut repo rates by 25 basis points and cash reserve ratio by 25 basis points. Repo rates are rates at which the RBI lends to banks and any drop in the rates signals lower interest rates.

Banks and financial institutions might now look at the possibility of dropping interest rates on deposits and fixed income securities, following the RBI move to cut repo and CRR rates.

They are not compelled to drop rates, but generally would do so following the RBI move with a time lag. Therefore those who live on interest income like widows and retired individuals could see their income being hit and should act wisely and here is how.

So what should retired individuals do?

Banks generally take time to cut their deposit rates and do so only after studying their asset-liability position. This means that banks will take time, if any, to reduce interest rates. So, retired folk who are planning to lock money in fixed deposits should do the same today. Also, interest rates are likely to fall further, as the governor has clearly hinted at pushing growth over inflation. By the end of the current year, one would not be surprised if interest rates fall by as much as 1 per cent on fixed deposits.

Therefore, those who depend on interest income should not only lock in money today, but should do so for a longer duration say of 3-5 years as interest rates are likely to fall further and they would hedge against falling interest rates.

GoodReturns.in

Read more about: rbi, monetary policy review
Story first published: Tuesday, January 29, 2013, 12:16 [IST]
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