The government's move to abolish high-denomination notes (HDN) has increased the probability of a cut in interest rates in the next few months as the move will increase liquidity in markets and ease the pressure on government borrowings. It is estimated that banks so far have received nearly Rs 2 lakh crore of deposits after the government banned old high-denomination notes and it is expected that a large of number of deposits would get added in the coming months. This would strengthen the banking system further. ETIG provides a low-down on how retail investors can invest in different asset classes after the fall in benchmark interest rates.
Loans:
Experts foresee interest rate cut by 75 basis points in the
next 12 months.
Every 1% rate reduction on home loans of Rs 10 lakh (20-year tenure) reduces EMI by Rs 1,000.
Home loans constitute nearly 50-60% of the total retail loans of the banks.
Cost of acquisition of cars may drop with lower interest rates; almost 80-85% are sold on finance.
Personal loans constituted nearly 22% of the total loans in September 2016.
Housing, auto and credit card loans grew by double-digit in September 2016.
Bond/Mutual Funds:
Every 1% rate reduction on home loans of Rs 10 lakh (20-year tenure) reduces EMI by Rs 1,000.
Home loans constitute nearly 50-60% of the total retail loans of the banks.
Cost of acquisition of cars may drop with lower interest rates; almost 80-85% are sold on finance.
Personal loans constituted nearly 22% of the total loans in September 2016.
Housing, auto and credit card loans grew by double-digit in September 2016.
Bond/Mutual Funds:
Bonds with higher duration to benefit most from lower
interest rates.
If the rate falls by 1%, investors may have capital appreciation of 5-6% for 10-year bond, while 9-10% for 20-year bond.
Equities:
If the rate falls by 1%, investors may have capital appreciation of 5-6% for 10-year bond, while 9-10% for 20-year bond.
Equities:
Bond yields are inversely correlated to P/E.
A 10-basis points change in the risk-free rate in India may increase the fair value of equities by 3-5%.
Interest Rates & Deposits:
A 10-basis points change in the risk-free rate in India may increase the fair value of equities by 3-5%.
Interest Rates & Deposits:
Low-cost deposit will move into the banking system due to
cash demonetisation.
Higher deposit and weak credit growth would prompt banks to go for rate cuts.
Higher dividend from RBI may reduce fiscal deficit for the government.
Lower government borrowings may lead to increase in corporate lending.
Higher deposit and weak credit growth would prompt banks to go for rate cuts.
Higher dividend from RBI may reduce fiscal deficit for the government.
Lower government borrowings may lead to increase in corporate lending.
Banks:
Banks will benefit from higher CASA growth as $190 billion
cash gets deposited with them.
PSU banks will be key beneficiary with market share of 76% of the total saving deposit.
Banks with higher CASA ratio will benefit more as their cost of funds drops.
PSU banks will be key beneficiary with market share of 76% of the total saving deposit.
Banks with higher CASA ratio will benefit more as their cost of funds drops.
**Source: Economic
Times Wealth
