When in doubt, think long-term: We are living in really interesting times. Recently a survey was conducted with its partners regarding the rate cut. Asked whether RBI can cut rates further. Interest rates can be raised or are likely to remain unchanged. Most of the participants in this were those who said that the interest rates running at lower levels will either be lower or they will be allowed to continue without change. There was a small group who believed that the rate could be increased.
RBI will change the priority
Earlier this year, when the Covid-19 epidemic first surfaced, the Reserve Bank of India (RBI )’s first priority was to ensure confidence in the markets while maintaining financial stability. The Reserve Bank also successfully achieved this goal. After achieving its first target, the Reserve Bank can now focus on more traditional economic indicators such as inflation fiscal deficit and currency fluctuations. So that the normal state can be restored along with the opening of the lockdown.
Inflation expected to decrease gradually
The inflation rate for the last 4 months is more than 6 percent, which is the threshold of RBI. When evaluating inflation in the future, we need to consider two essential factors. First, inflation was largely due to supply chain disruptions in the previous months. Although the economy is now slowly opening up, in such a situation logistic problems can be overcome soon. The second normal monsoon should help to keep food prices stable, which carries the most weightage in the inflation basket. Therefore, it can be concluded that inflation may come down gradually in some quarters.
Expect rate cut
However, even though inflation is still a matter, there is more concern that the economy is going to be sluggish in the coming few months. So in the coming days, RBI can keep the interest rates paused. At the same time, rates can also be reduced to support growth. Apart from this, RBI can also take measures to support growth through non-monetary tools such as OMO or Operation Twist.
What should small investors do?
Then what do these things mean for small investors? What should they do in such a scenario? Since interest rates are expected to be at a range-bound or lower level, investors should continue to invest in debt funds based on investment horizon and risk preference. But this investment should be done thinking long term goal. There is a general observation that where investors invest for a long period, their chances of increasing returns become equally strong.
Where should invest
Investors should now invest in banking PSU funds, dynamic bond funds, or mid to long term funds. The important thing is that investors need to be patient after investing money. They should choose high credit quality bonds and take care of the market base.
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