The RBI has kept the repo rate unchanged at 6.25 percent contrary to the expectations of economists who were hoping for a 0.25 percent cut in the rate. However, RBI Governor Urjit Patel, analysing certain factors, decided to play safe by not cutting the rate.
After demonatisation, banks have already cut their lending rates which in turn can bring certain contrary impact on traditional investment avenues like fixed deposits and savings deposit schemes as banks are already flush with money.
Impact on bank fixed deposits:
Currently, banks are getting money at the same rates from RBI, which means they will be paying same interest rates to its customers on FDs. Since banks already have accumulated lots of money after the demonatisation move, this may result into lending rates going down further, which can impact the interest rates of FDs. If this happens, this will impact senior citizens and other retired individuals drastically who are more or less dependent on interest income from bank FDs and related schemes.
Rather, it is suggested to liquidate short-term fixed deposits, (if you are having any) and invest the same amount in diversified mutual fund schemes or G-sec bonds. While doing so you must keep your long-term FDs safe.
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Impact on equity markets:
There is still a positive impact on consumption as interest rates remain the same. This means that high profits and better valuation in the equity market can be further projected. Consumption levels which have already been on the higher side will fuel the corporate revenues and profitability of companies. The lower rate of returns from products like bank FDs will propel consumers to invest more in equities to get much better returns. This factor will drive investments in equities, but actually the performance and returns from equity markets will depend on other market factors too.
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You must, however, know that not all banks will pass on the benefit of the credit policy in the same manner to its borrowers. It is, therefore, very crucial to compare interest rates at different financial institutions before availing a loan or making an investment in financial markets so as to get the maximum benefit from your investment.