Don't Keep Cash in Your Almirah If the RBI Cuts Rates by 1% or More - Views on News from Equitymaster

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The Equitymaster Research Digest

Don't Keep Cash in Your Almirah If the RBI Cuts Rates by 1% or More
Mar 30, 2016

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Three-year fixed deposits with State Bank of India fetch up to 7.5%. And you can expect similar returns on deposits at top private sector banks. If you rely on fixed deposits, you are pocketing a net return of about 1.5%.

I am sure most of you have got the math. But please bear with me as I try to correlate the negative interest rate crisis in Japan with a possible crisis for depositors in India...

Inflation at the consumer level is currently about 5.9% in India. (That's why depositors are fetching a net positive return of nearly 1.5%.) Now, RBI governor, Dr Rajan, has been under pressure the past few months to cut rates and cut them sharply. Given that the 5 April Monetary Policy Review may be his last, Dr Rajan may have to do his bit to please the government and stock markets.

It helps that a rate hike from the US Fed is some time away and that the inflation numbers are benign, at least for the time being. Therefore, a cut of 0.5% on the repo rate is almost a given.

But what if Dr Rajan decides to get adventurous and double the rate cut to 1%? As Ajit Dayal, founder of Equitymaster, pointed out in his latest Honest Truth, there are enough reasons to make such a steep cut possible.

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