Catching the ‘higher interest rate’ corporate deposit bus
Since the beginning of calendar 2019, the RBI has reduced its benchmark interest rate every time the monetary policy committee has met.
After its fourth consecutive rate cut, the repo rate stands at 5.40%.
Now here’s why the repo rate is becoming more and more relevant for you as an investor or borrower.
During the August 2019 MPC meet, RBI governor remarked, “The transmission of policy repo rate cuts to the weighted average lending rates (WALRs) on fresh rupee loans of banks has improved marginally since the last meeting of the MPC. Overall, banks reduced their WALR on fresh rupee loans by 29 bps during the current easing phase so far (February-June 2019).”
Put simply, this means that banks are beginning to follow the benchmark rate movement slightly more closely. So, a repo rate cut by the RBI is more likely to translate into a rate cut by banks for their lenders and borrowers.
Not surprisingly then, the effects are visible on the ground.
Reputed banks like State Bank of India, Punjab National Bank and many others have reduced their deposit rates by 10-35 basis points, depending upon the maturities. Companies like HDFC Limited, Mahindra Finance and LIC Housing Finance have been slashing rates on deposits even more aggressively, by around 25-35 basis points.
This has caught the attention of investors, who were already facing uncertainty in equities on account of various international and domestic triggers. All of a sudden, it feels like an opportunity is slipping away before their very eyes.
But all’s not lost yet. Due to the steep drop in interest rates, it stands to reason that interest rates were higher, not so long ago. So, despite the falling interest scenario, there are still some AAA-rated corporate bonds, which were issued during the higher interest rate era, that offer as much as 8-9% interest fora 5-year tenure.
Some of these companies are expected to reduce their interest rates soon while others have already announced rate reductions which will come into effect from September 1st.
Till then, there is scope for investors to lock in their investments at 100-250 basis points higher than bank deposits, depending on which tenure is chosen as most corporate bonds are available for tenures of 1,2, 3 and 5 years.
In a time of falling rates and volatile stocks, it certainly looks like a cushy bus to board!
But investors need to take action soon if they don’t want to miss the bus.
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Audio option is really very good.
What about the long dated (10 years) or perpetual Bonds issued by Banks including PSU Banks which offer a coupon rate of more than 10% and a yield of around 10 to 11% with yearly interest payment and repayment at face value.