Fixed Deposit rates can increase

In the recent credit policy review of the Reserve Bank of India (RBI) there were indications of rising interest rate which is good news for those who prefer to invest in fixed deposits. The central bank has given indications that in the coming days the rates can be tighten up and its impact can be seen in the first quarter of the next year.

In year 2009 various changes could be seen in the interest rate cycles and the rates were under the scrutiny of the central bank throughout the year. However the incentive packages introduced for the revival of financial markets brought down the rates nearly to zero levels in most economies but the in the domestic market the decline of rates was not major. It was only by a couple of percentage points that the domestic deposit rates had reduced during the first half of the current year.

It was government’s aggressive borrowing that was responsible in slowing down the fall and this was visible in the poor performance of income funds. Although it was observed that lack of fall or even the steady rise in long term paper rates have been responsible to bring changes in the performance of income funds.

In the near future there will not be much change in the scenario as RBI has indicated tightening of rates. Thus, those who have invested in income funds in the recent time will continue to face the tough times.

But rise in rates is definitely be a good news for the investors who prefer fixed deposits. In the last few quarters the rates had started falling, at present are not in the revival mode but can reverse in early to middle of 2009. Therefore the investors who like to invest their funds in fixed deposits can wait for few months to make the investments.

On the other hand if you invest funds in floaters it is not bad as they automatically take note of the changing interest rate scenario. As the inflation is also moving upwards, there are chances of the general interest rates to move up.

In case you are taking loan then the upcoming scenario is not going to be comfortable as rising rates will again push up the borrowing costs. The immediate impact could be seen on the products like personal loans and car loans although on the latter one the borrowers can get relief from manufactures side.

The recent change in the auto sector has again revived the hopes for the sector and the increasing competition in the passenger car segment can force OEMs to offer discounts. Such discounts can be in the form of subsidized interest rates as is given during boom times.

But for the two-wheeler segment the scenario is different due to high margin pressure in this segment. Moreover the loan ticket size is small therefore the competition amongst the lenders is restricted to a few players. Therefore, buyers might not get huge discount offers.

Meanwhile the home loan borrowers might have an escape from the pressures of high borrowing costs as the RBI is believed to be looking at supporting sector. There is news that banks will probably increase the share towards the priority sector lending and property loans can be a bigger chunk for the banks. This can help in reversing the ill effects of rising borrowing costs and shall help the customer base in a big way.