Bonds to loans: What RBI policy means for retail investors

In its second quarter review on monetary policy, the Reserve Bank of India today stepped up its fight against inflation by raising its policy rate by 25 basis points to 7.75 percent. The central bank also cut its marginal standing facility rate by 25 bps to 8.75 percent, in its bid to reduce the short-term borrowing costs for corporates. The Reserve Bank kept CRR unchanged at 4 percent and cut FY14 GDP growth to 5 percent from 5.5 percent. (Read more in this Firstpost report)

What does this mean for retail investors?

“The RBI move puts around Rs 15,000 crore liquidity into the system. It is too early to say if banks will pass on the hike in rates to customers, or hike FD rates or choose to absorb it and continue lending on current terms,” saidPankaj Mathpal, Mumbai based, Certified Financial Planner. The release of the funds is due to the cut in MSF rate and also widening of the 7-day and 14-day repo windows.

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So despite the repo rate increase banks have reason to be happy. However, it usually takes a few days for them to transmit the policy moves to customers. The reaction to the RBI move also varies for banks as cost of funds is different for different banks. Most banks are already offering discounts on various loans. In fact, some are even lending at their base rate.

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Just a few days back Corporation Bank Ltd announced that its consumer durables loan gets a generous rate cut from 12.25 percent to 10.50 percent. Punjab National Bank had also cut its rates on car loans, the new rate stands at 10.65 percent. While Oriental Bank of Commerce’s new rates stand at 12 percent. Both these banks are already offering home loans at their base rate, so a future cut on home loan rates is not an option for PNB and Oriental Bank of Commerce.

IDBI bank has also slashed its auto loan rate and new rates stand at 10.25 percent. The bank also cut home loan rates which now stands at the bank’s base rate of 10.25 percent. Dena Bank Ltd has a home and car loan combo deal where home loan will be a 10.25 percent while car loan would be 11.75 percent.

Tax free bonds

But if you are looking to invest in Tax Free Bonds, there are some with mouth watering returns available in the market now. Subscription to India Infrastructure Finance Company (IIFCL) and Power Finance Corporation (PFC) bonds are currently open. For IIFCL, the coupon rates are 8.26 percent, 8.63 percent and 8.75 percent for different tenures and for PFC issues the rates are 8.43 percent, 8.79 percent, and 8.92 percent.

“With today’s 25 basis point hike in the key policy rate, there is a good chance that the future issues of Tax Free Bond which are expected to hit the market will offer even higher coupon rates, than what is being currently offered in the market. So, it make sense for those who are planning to invest in TFBs to wait and watch,“Panjak Mathpal says.

Inflation indexed bonds

Wishing investors a happy Diwali, Raghuram Rajan also promised the launch of inflation indexed bonds for retail investors by end November or December. I

“Inflation indexed securities for retail investors of 10-year tenor would be linked to the new (combined) consumer price index. Eligible investors would consist of individuals, hindu undivided families (HUFs), trusts and charitable institutions. The rate of interest on these securities would comprise of a fixed rate plus inflation. Interest would be compounded half-yearly and paid cumulatively at redemption. These securities will be distributed through banks, the RBI said.