The Reserve Bank of India (RBI) in its October 2009 credit policy has signalled a first phase of exit from the accommodative policy of the recent past, by taking the following measures:
- Statutory Liquidity Ratio (SLR) has been increased from 24% to 25% - This will reduce the liquidity in the monetary system
- Cash Reserve Ratio (CRR) has been left unchanged at 5%
- The repo rate is unchanged at 4.75%
- The reverse repo is unchanged at 3.25%
- Bank rate has been left unchanged at 6%
- GDP growth estimates for the fiscal year 2009-10 is down to 6%. This is after factoring in a decline in the food grain production and a sustained increase in the industrial production
With worries of inflation reaching 6.5% by March 2010, the Central Bank has hinted at a rate hike in CRR towards the end of December 2009 or early January 2010. Interest rates are also expected to increase in Q1 of 2010.
We opine that in the current scenario investors should not invest in debt funds as the interest rates in the economy are expected to move up. This is mainly because interest rates and bond prices are inversely correlated to each other. In such a situation, one can invest in Fixed Deposit (FDs) once the interest rates firm up.
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