The equity markets witnessed a fall close to 39 per cent from its all-time high in just a matter of two months. However, it also recovered 42 per cent from the low. The spill-over of the equity market was reflected in the fixed income market also. One of the ways to arrest the fall in the equity market was to lower the interest rate by the apex bank in India. As such, the Reserve Bank of India (RBI) reduced the repo rate close to 115 basis points or 1.15 per cent. This created a wave of cheer in the debt market as interest rates continued to fall, which in turn boosted bond value.
With the fall in overall interest rate, we have seen a decline in rate of interest offered to various small savings schemes by the government. This fall, while it spelt good fortune for bond investors, did not go down too well with investors who have parked their savings in small savings schemes. Considering that small savings schemes are held till maturity, they are prone to interest rate and re-investment risk.
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July 20, 2020