Real Returns head south due to rate cuts and inflation

A steep fall in the deposit rates and rising inflation has created a double whammy for investors. And no doubt, the corona pandemic is the culprit. On the one hand, the interest rates have plummeted. On the other consumer price index has gone up creating inflationary trends.

The RBI has slashed its benchmark repo rate by 113 basis points between March & May to support the already tethering economy in the wake of slowdown because of Corona Virus. As a result, banks had to cut the lending and deposit rates to adjust the new rate scenario.

Corona induced lockdown pushed up the consumer price index as the supplies of essential items faced huge constraints. Therefore, the net result is negative, and it has affected consumers cum investors on both fronts.

Till September 2019, SBI was offering 6.5% interest on the deposit for a period of one year. The wholesale price index was hovering at around 3.92%. In simple terms, the investors had a positive impact on their net savings by 250 basis points.

In the current scenario, things have altered. Now, on a one-year deposit, SBI is offering 5.10% interest. Whereas, the consumer price index has risen to 6.09% year-on-year in June 2020. Figures for April and May of 2020 were released only with the June ones, as visits to collect the data were suspended from March 19th due to the coronavirus lockdown.

Investors are looking askance as to where to park the hard-earned money in these crisis times? More so, when the world economy is facing its one of the toughest times after the economic depression of 1929 that had a catastrophic effect worldwide. Hence, it is likely that domestic savings will be one of the worst affected.

But the good news is that the Indian Foreign reserve exchange has swelled to one of the highest times and it is mainly because of reduced import bills, RBI buying spree, and foreign investor’s interest in domestic stock and debt markets & FDI inflows. For instance, recent funding by Google and Facebook in Reliance Jio. It must be informed here during the last two months, Petroleum to Telecom behemoth, Reliance Industries has sold its approximately 18% stake to Facebook and Google at $ 10.2 billion.

So, does it mean that there is a rainbow on the horizon? Well, believing the experts there is. According to the punters of the economy, real returns should be judged over a staggered period and not on a piece of meal data of one month. Experts are of the view that interest rates have lowered due to the demand contraction. It also means that after a year, inflation would head south. Economists have a viewpoint, that by the end of 2020, the consumer price index will come down to 4%. Thus, the net result will be positive. But that’s in the future.

Link1 https://tradingeconomics.com/india/inflation-cpi

Link 2 https://scroll.in/article/964823/indias-foreign-exchange-reserves-are-at-an-all-time-high-amid-an-economic-slowdown#:~:text=The%20reasons%20behind%20the%20swelling,Bank%20of%20India’s%20buying%20spree.

 

Share

Share on facebook
Facebook
Share on twitter
Twitter
Share on google
Google+
Share on linkedin
LinkedIn
Share on whatsapp
WhatsApp

most popular blogs

Leave a Comment

Welcome to Maloo Investwise

Disclaimer: This information will help us to contact you. Your personal information will not be shared.

Welcome to Maloo Investwise

Disclaimer: Dear Investor, By clicking on the submit button you will be redirected to our secured website. This link is provided only for the convenience of our visitors. The site has the necessary tools to help you understand your risk profile, asset allocation, and goal calculations. You will also be able to open a folio and transact online in mutual funds.

Welcome to Maloo Investwise

Disclaimer: Dear Investor, By clicking on the submit button you will be redirected to our secured website. This link is provided only for the convenience of our visitors. The site has the necessary tools to help you understand your risk profile, asset allocation, and goal calculations. You will also be able to open a folio and transact online in mutual funds.

Open chat