(Image source from: RBI rate cut encourages borrowers})

The rate cut from the Reserve Bank of India on last Thursday spells good news for borrowers who may expect their EMIs to fall. For depositors, a falling interest scenario suggests that banks have to cut their fixed deposit rates, which will hurt the interest income of those investing in bank deposits.

Arundhati Bhattacharya, chairman of State Bank of India, said, "We believe that this RBI cut may be just the beginning of a rate easing cycle... Base rate is expected to fall faster than expected."

Mahesh Nandurkar, executive director at CLSA, says banks are likely to cut deposit rates as the credit demand remains weak. Besides, falling commodity prices will reduce the demand for working capital from corporate and banks would have adequate liquidity. He sees the RBI cutting its policy rate by 50 bps to 100 bps this year and banks cutting their lending rates even by more due to weak credit off-take.

What should an investor do who wants to put money in bank fixed deposits? Invest for the long term, says Mumbai-based planner Suresh Sadagopan. He also suggests that investors with a slightly higher risk appetite can look at fixed income or mutual funds. Mutual funds investing in longer-term debt securities look particularly attractive. 

A Balasubramanian, CEO of Birla Sun Life Asset Management Company, suggests investors to invest in dynamic debt bond funds in which fund managers actively shuffle the bond portfolio to take advantage of emerging opportunities.

By Premji