Cushioning Impact Of Rate Cuts

Outlook Money|May 2020

Cushioning Impact Of Rate Cuts
Tweak your investment strategy, invest in liquid schemes and opt for Systematic Transfer Plans
Anagh Pal

The world grapples with COVID-19 pandemic with the economy facing one of the steepest challenges since the Great Depression. While governments are announcing stimulus packages, central banks all over the world are lowering interest rates because they want more money in the economy to spur demand. The Reserve Bank of India (RBI) to has lowered the reverse repo rates from 4 per cent to 3.75 per cent.

“As per the recent announcements by the RBI, we can expect a further cut in the interest rates in the near future. The RBI is trying to maintain adequate liquidity in the system and ease the inflationary pressure on the economy,” says Harsh Jain, Co-founder and COO, Groww.

“Interest rates are likely to remain low for at least the next 3 months. Thereafter, depending on the containment of the virus and resumption of economic activity, it is possible that RBI may slowly start tightening and interest rates may go up, but only marginally. There is no clarity on this presently,” says VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

However, one needs to understand that one should not focus on the nominal interest rate, but on the real interest rate. “This is because if the inflation is high, even if the nominal interest is high, your real interest rate may be low because your purchasing power goes down,” says Vidhu Shekhar, Country Head, CFA Institute.

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May 2020