Finally some good news that I have been waiting for. The interest rates for the governments schemes have come down. Just in yesterday's post I have been complaining about the high interest rates of many of these schemes have been the barrier for the rate cut transmissions.

I am not particularly happy about the rate cut because it does not really help. The banks rarely cut the lending rates because they still have to honor the FDs which are fixed at the previous interest rate for a fixed duration. Moreover the FD rates are quite high compared to the repo rate because otherwise people will not deposit with banks, instead they will go with PPF or other government schemes offering high interest rate.

What To Do During The Crisis and Lockdown?

While RBI has cut repo rates many times to the tune of 2.1% in the last 1 year, government schemes have been enjoying a healthy interest rate. I guess the government trying to be pro-social could not cut the rates for fear of backlash both from citizens and opposition. In the last 1 year it has cut only 0.1%. Now the cut is about 0.7% to 1.4% in various schemes. Still not enough. But I am hopeful that this will ease the liquidity situation.

The reason banks are not transmitting the rate cut is because if they cut interest rates then people will stop investing in FDs of the bank. There are other fixed income government schemes that provide better interest rates why choose the low FD rate? So banks do not cut interest rates on FDs. If they don't cut interest rates in FD they cannot cut on loans because they will lose margins (read profits). In this situation, any rate cut by RBI is never transmitted to the end user. The whole point of the RBI rate cut is to improve liquidity in the system and reduce the burden of loans, but that never gets realized.

This is all well and good for the economy, but "what about me?" you say?. Well, this means your fixed income investments will give you lower returns. It also affects my parents since they rely on Senior Citizen Savings Scheme. But it is expected. You cannot expect inflation to be low and your fixed income returns to be high. In the future I am sure all banks will cut their FD rates. Some government banks like SBI have been diligently cutting FD and loan interest rates. But private banks have been resisting. Now things should hopefully change. So your FDs will also fetch you less.

There is nothing much you can do in this situation. Just continue with your investments and re-calibrate your expectations from fixed income funds. Don't blindly move investments into debt mutual funds seeking higher returns. Most likely the debt mutual fund returns will also come down. Understand your risk and tax profile and invest according in FD or debt mutual funds like you have always been doing. This aberration is a red herring.