Interest Rate Cycle Peaks
The Reserve Bank of India has just cut the CRR - without even waiting for the review due on March 15, 2012. That too by a "more-than-expected" 75 basis points.
This indicates a few interesting points about the thought process of the RBI:
- RBI thinks that the liquidity situation is quite tight.
- RBI feels that due to the Advance Tax payments next week, the liquidity situation will become even worse in the immediate future.
- RBI feels that the danger of slowing-down of GDB growth rates is very live and real. Enough to act, and act decisively.
While this may not result in an immediate reduction in the interest rates for home loan borrowers (and other borrowers as well), this is as powerful and as strong a signal as any that the Interest Rate Cycle has peaked in India. There's no doubt about that.
How does this impact us? A few ways in which it is likely to impact us:
- Market performance of interest-rate sensitive companies (like banks, automobile companies, infrastructure majors, real estate & construction companies, etc.) should do well in the months and quarters ahead. Hence, every dip in share prices should be used to load up shares of such companies. Obviously, we should focus on those that have been beaten down the most while the interest rates were moving up.
- Loan rates are certainly unlikely to go up significantly any longer. On the contrary, the interest rates on loans should start inching lower in the quarters ahead. Home-loan & Car-loan customers can heave a sigh of relief.
- Those who are planning to take a loan in the immediate future MUST take only a floating rate loan (even though, I'm sure, many banks would love to tempt you with supposedly attractive fixed rate loans). After all, once the interest rates start going down, they are likely to keep going down at least for a few quarters before taking a turn upwards.
- Those who are having fixed deposits (or planning to open fixed deposits) should use the presently prevailing high rates to lock-in their money in fixed deposits for as long a duration as possible. There are some good public sector banks which accept deposits for a period as long as 10 years. This would come in handy especially for recently retired senior citizens.
- Growth is likely to be back for Indian corporates - After tightening the belt for almost 4 years, chances are bright that you'll see smiles on the faces of CFOs. This should, hopefully, indicate increased job opportunities - both for freshers and for people looking forward to switch jobs to greener pastures.
Let's wait and watch the budget - and see if the Finance Minister also gives us reasons to cheer.