Mirror, Mirror on the wall
Will interest rates rise or will they fall?

Would it not be fabulous if we could gaze into a crystal ball and decipher what the central bank's next move would be? Unfortunately, or probably fortunately, such wishful thinking comes alive only in fairy tales. In reality, ambiguity is more the norm than the exception.

Ahead of the RBI's quarterly monetary statement on July 31, 2012, uncertainty rules as the debate continues on whether the Reserve Bank of India will cut rates or maintain a status quo.

In the June 18, 2012, mid-quarter monetary policy review, the RBI kept key policy rates unchanged, much to the dismay of market players who were expecting a rate cut. But given the stubbornly high inflation figures, the central bank could not afford the luxury of a cut. Though policy rates have been increased 13 times since March 2010, inflation has adamantly remained in the 9.5%-10% range over the past 2 years; a clear indication that monetary measures alone are insufficient.

The media has publicized the comments from the central banking authorities calling for fiscal steps by the government to combat inflation. Unfortunately, it has fallen on deaf ears and the lack of initiative on part of the government has only aggravated the issue.

Without adequate measures from the government, the RBI has limited room to reduce rates. High interest rates do impact growth negatively, but India's growth story getting derailed also needs to be blamed on the absence of structural reforms.

The research team at fundsupermart.com is of the view that the UPA government, which has not done much in terms of reforms, will continue with its inactive stance for the next few months. As economic growth falters, inflation is still above the RBI's comfort zone while a faltering monsoon adds to the overall gloom since it is the key to volatile food prices.

While the debate continues on how the RBI will react to the economic climate, we recommend short-term income funds in this uncertain, and highly unpredictable, scenario. Investors should look at parking their cash in any of these four recommended funds with a time frame of around 12 months or so.

The current, average 1-year return of debt funds in the ultra short-term and short-term category is in the 9.50 per cent vicinity. So do yourself a favour and refrain from leaving cash idle in a savings bank account. Capitalise on the market scenario which is throwing up a much better return in a short-term fund. If you are confused between a fixed deposit and a short-term debt fund, clarify your doubts by reading Funds score over bank deposits.

Author: iFAST Content Team, Fundsupermart.com