Interest Rates Are Headed Higher; Here's Why?

Business

oi-Sunil Fernandes

By Sunil Fernandes

Published: Thursday, May 17, 2018, 10:12 [IST]

For the last 3-4 years, retired folk have had to battle with inflation and lower interest rates. In fact, bank interest rates had dropped to as low as 6 per cent, barely yielding real rates of return beyond two.

Real rates of interest are defined as the difference between interest rates received and inflation.

The first signs of interest rates rising

The first signs of bond yields surging were evident a few months back. However, earlier this week, yields rose by 10 basis and surged past 7.80 with considerable ease. On Monday, the benchmark 10-year bond yield rose by 10 basis points and ended at 7.83 per cent, its highest since February 2016.

The sharp spike in yields, had largely to do with consumer price inflation surging. Consumer price index inflation for April stood at 4.58 percent, higher than an estimated 4.42 percent, raising worries that the Reserve Bank of India may consider a rate hike as early as June 2018. If that happens deposit rates may go higher and so would lending rates on home loans, gold loans, auto loans and personal loans.

At least, August 2018 looks certain for an interest rate hike.

Banks have already raised interest rates

Many banks have already started raising deposits, including the likes of State Bank of India and Punjab National Bank. We may likely see that trend continue as bond yields rise and also as inflation in the economy surges. How fast they would rise is difficult to say, but, one can expect at least a 50 basis points rise in interest rate in the next one year. Therefore, the advise to investors is simple: do not invest in FDs with a long-term duration.

For example, if you are planning to invest in FDs with a tenure of 3-years, do not go for it, as interest rates may rise and you would be trapped with lower interest rates. If you break the deposit and reinvest the same, you might have to pay a one per cent penalty.

Finally, we may have some respite from interest rates that have been abysmally low for a while.

GoodReturns.in