Monday, April 1, 2013

Interest rates are like double edged swords. A rise in rate suggests higher cost of borrowings. For households this may mean higher equated monthly instalments (EMIs) on loans. For investors in stocks this may mean risky exposure to high leverage companies. In times of high inflation, steep interest rates are therefore an additional burden. But a cut in interest rate by the Reserve Bank of India (RBI) is not reason enough to rejoice either! Investors in saving schemes like Senior Citizen Saving Scheme (SCSS), National Saving Certificate (NSC) and Public Provident Fund (PPF) have recently learned it the hard way. Interest rates on each of these saving schemes were cut by 0.1%. Since the rates are linked to the yields of government securities in the previous calendar year, there is room for more cuts. This is even if the central bank pauses rate cuts for some time. As per Economic Times, without any further policy action during the year, investors should brace for 
rate cuts of 0.3% on NSC and 0.45% on PPFs in coming months. Time to review your asset allocation.