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RBI Policy Terms For Aam Aadmi
RBI Policy Terms For Aam Aadmi
Investing in Equity Mutual Funds > Aam aadmis takeaways from RBI policies
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12/3/2014
Investing in Equity Mutual Funds > Aam aadmis takeaways from RBI policies
Open Market Operations (OMO) - As banks are the biggest owners of bonds issued by the government (government
securities or G-Secs), the RBI would buy G-secs (OMO purchases) from banks to increase the liquidity in the system or
sell its stock of G-secs (OMO sales) to drain out excess liquidity from the banking system.
The RBI can use many other tools to regulate the credit flow to corporate and individual borrowers like Risk Weights &
Provisioning Norms but to avoid complication we would avoid discussing them.
Thus in a nut shell RBI policy moves are like the steering wheel of the banking industry. Given this what is the impact on
you as an individual?
For borrowers, it is bank lending rates which matter more than market yields of debt securities. In the last 3 months bond
market and money market yields have fallen sharply, but banks have not reduced lending rates. However RBI is proactively providing liquidity and as the RBI gets more comfortable on the inflation trajectory, which has cooled down
considerably, liquidity will be made even easier. Banks funding costs could fall even more in the coming months,
allowing them to cut lending rates along with the easy monetary policy stance.
For savers in fixed deposits, since the repo rate will hold @ 8% for some more time, one can expect deposit rates to
remain around the current 8-9% mark. This when seen from the reported and expected CPI inflation levels for next year;
the 9% rate seems definitely attractive. It may be prudent to increase the tenor of your fixed deposit investments beyond
the 1 year and lock into these rates for longer tenors.
The same holds true for investors in money market through liquid funds. Given that RBI will hold interest rates @ 8%;
bond yields at or near the 8% rate one can invest in these since CPI inflation is now at 6% levels.
Hope you have got the gist of how RBI policy changes affect our savings, investment and borrowing. In case of queries
on this please feel free to contact us. You can give a missed call on 022-61073807 and we will be glad to get back to
you.
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