Don’t let coronomics spoil your dosanomics

Dosanomics may not work at a time like this...

Dosanomics says when nominal interest rates are falling and there’s a concurrent fall in the prices of Dosas (read household consumption items); you can still buy the same number of dosas. As against this, if the nominal interest rates are high and prices of dosas are inching higher, you might get fewer dosas despite higher interest rates.

We are in an unprecedented situation; thanks to a tiny little virus.

Interest rates are falling substantially but inflation is still high.

In the present time of uncertainty many investors are facing a dilemma—who to trust, especially with fixed-income investments.

The memories of some high profile new-age private sector and co-operative banks going belly-up are fresh. But at the same time, the falling interest income on account of falling interest rates is equally worrisome.

Interest rate scenario at present...

To put up a fight against the slowdown caused by COVID-19, RBI has aggressively slashed the policy rates at the 7^th bi-monthly monetary policy in March.  It not only reduced the window between repo and reverse repo — thereby discouraging banks from parking their surplus in reverse repos—but it also reduced CRR by 100bps to free up liquidity for lending activities. One bp is 1/100^th of a per cent.

RBI has also indicated that it may adopt avant-grade policies and cut policy rates further, if required.

On the other hand, banks being sloshed with liquidity are going ultra-conservative with lending and thus they are unlikely to raise interest rates on deposits. In fact, as soon as RBI reduces policy rates, they may reduce interest rates on deposits.

For instance, the RBI announced a 75-basis point cut in the repo rate on 27^th March, many banks responded to it with a steep cut in their interest rates on fixed deposits across various tenures. SBI has slashed the FD interest rates by 25-50 basis points depending upon the tenure and ICICI Bank has reduced it by 40-50 basis points.

How to find a way out?

The answer is simple, by making an intelligent decision.

Under such circumstances, you may consider investing in top-quality corporate fixed deposits.

In the recent past, there have been instances of corporate defaulting on their payments. But a few well-run private sector Non-Banking Finance Companies (NBFCs) have managed to keep their record impeccable even when the economy was faced with the greatest challenges.

If you want to earn an extra buck in interest, without losing any sleep, you may consider some top-notch corporate fixed deposit options over the conventional bank FDs.

The tenure of these corporate FDs usually ranges between 1-7 years with the interest rates varying between 7 % to 9%, depending upon the tenure and issuer. Also, with the help of financial experts, one may invest in these FDs from the comfort of one’s home.

Currently, HDFC Ltd., Bajaj Finance Ltd., M&M Financial Services Ltd. are few of the top AAA rated corporate FDs that can be considered by those who wish to lock their investments into stress free instruments for a longer duration. The interest rates for these FDs vary between 7% and 8% as per the issue and tenure, with an additional benefit of 0.25% for senior citizens.

Wait no further.

If RBI slashes policy rates further, even these companies may revise their interest rates downwards. At 5.91% in March, retail inflation is still high as compared to the RBI’s medium term target of 4%. Extraordinary conditions caused by Coronavirus outbreak have forced RBI to reduce rates in an attempt to prop up growth. As a result, your inflation adjusted return may reduce substantially, should interest rates move further southwards.

Plan your investment in secured and high paying corporate FD while staying within the boundaries of your home. Contact us on Bondsonline@ventura1.com for investment help or further enquiries.

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Disclaimer:

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.