Your Money: Go for floater funds, floating rate bonds or market-linked debentures

The repo rate is currently at an all-time low of 4%. The repo rate is likely to remain in the 4-5% range for some time now, given the prevailing macroeconomic scenario.

This brings us to what bond investors need to do. Investors with already purchased bonds would likely have coupon rates higher than prevailing market rates, in which case they should complete the bond term to maturity and not exit prematurely.
This brings us to what bond investors need to do. Investors with already purchased bonds would likely have coupon rates higher than prevailing market rates, in which case they should complete the bond term to maturity and not exit prematurely.

By Hemanth Gorur

While borrowers are rejoicing at the falling interest rates, bond investors and takers for term deposits are wringing their hands in despair. Investors depending on fixed income have seen their interest income dip in the recent past. This situation may persist for some time, but all is not lost for bond investors. Knowing how interest rates in the market move and what alternative investment products available can help navigate these tough times in a smart way.

Interest rates that matter
The interest rate story starts with the RBI’s repo rate. The repo rate is the rate at which RBI lends to all other banks. Retail lending rates of banks are directly linked to the repo rate. Currently, banks quote a ‘spread’ over and above the repo rate, giving the Repo rate Linked Lending Rate (RLLR).

On the deposits’ side, interest rates at any bank are usually 2-3 percentage points lower than the corresponding lending rates of that bank. Deposit interest rates and loan interest rates tend to move in sync, but the former are quicker to fall and slower to rise while the opposite is true for the latter.

Finally, bond interest rates are the coupon rate that is guaranteed to be paid out to the bond investor. When interest rates fall in the market, bond prices rise since bonds are more in demand compared to deposits, but interest rates of bonds already purchased are not affected.

Current rate trends in the market
The repo rate is currently at an all-time low of 4%. The repo rate is likely to remain in the 4-5% range for some time now, given the prevailing macroeconomic scenario.

Similarly, bank lending rates too have trended south. As per RBI data, the Weighted Average Lending Rates (WALR) of both existing and fresh loans across banks have dipped continuously over the last nine years. While the former has moved from around 12% to around 8% in this period, the latter has slid from around 12% to around 6%.

Deposit rates too have displayed similar behaviour, with the Weighted Average Domestic Term Deposit Rates (WADTDR) plunging from around 9% eight years back to around 5% currently. As long as the repo rate stays in the aforementioned range, deposit rates and bond interest rates are likely to stay muted at current levels for a year or two.

What bond investors can do?
This brings us to what bond investors need to do. Investors with already purchased bonds would likely have coupon rates higher than prevailing market rates, in which case they should complete the bond term to maturity and not exit prematurely.

Investors looking to invest in bonds are better off opting for bonds of lower term to maturity. This is because you do not want to lock in to a low interest rate for a longer tenure when there is all likelihood of interest rates rising once macroeconomic signals permit. Alternatively, investors can also go for floating rate bonds, market-linked debentures, or floater funds, where the interest rates would rise with the prevailing rates in the market. Since interest rates have bottomed out, there is little or no risk of their falling further from current levels.

Bond markets are not as volatile as stock markets, so take the time to do your due diligence and take an informed decision.

The writer is founder, Hermoneytalks.com

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