The events in the last week suggest that low interest rates in India are here to stay for some time despite a steady rise in inflation that is usually a precursor for higher interest rates. The new financial year started with the central government announcing a sharp cut in interest rate on post office deposits and public provident funds deposits.
The order was withdrawn within hours due to its adverse impact on savers in the election-bound states of West Bengal, Tamil Nadu, Assam and Kerala. Now most observers expect the new rates to come into force as soon as the current round of assembly elections is over.
Moreover, Reserve Bank of India Governor Shaktikanta Das made it clear in his latest monetary policy statement on Wednesday that control on bond yields or interest rates is his prime concern right now. This rules out a hike in RBI policy rate despite rising inflation in India and higher bond yields in the United States and many emerging markets.
This is bad news for savers and retired people who largely invest in bank and post office fixed deposits.
While it’s tough for risk-averse savers and investors to completely escape from the negative effects of a low interest rate environment, you can rejig your investments to reduce the impact on your portfolio. Here are six-ways to minimise the potential downside from a low interest rate regime right now.
1. Lock-in your savings in long-term FDs at current interest rates. The most obvious thing to do right now is to start a new bank or post office FDs at the current rate of interest rates. One can also start a 5-year recurring deposit in banks or post offices to lock in the interest rate at current level. Interest rates on FDs and RDs are the same for a similar tenure. Many will find even the current interest rates ridiculously low but they could fall further in the next few months.
Also Read: 10 best FDs in India right now
2. Look for small banks that offer a higher interest rate on deposits. The big banks in public and the private sector get most of their funds from salary accounts and corporate deposits and offer some of the lowest interest rates on their deposits. Open an account in smaller banks, which want to get new depositors by offering higher interest rates.
Jana Small Finance Bank for example is offering 7.51 percent interest on FD with tenure of 3 years and 3 months. Urban co-operative banks also offer higher interest rates than other banks.
3. Invest in corporate deposits. Many companies, especially non-banking finance companies (NBFCs), also raise money from the public through deposits. Large NBFCs, with a national footprint and established business, are a good alternative to commercial banks for savers and investors. Quite a few of these NBFCs offer up to 8.5 percent yield on their long-tenure deposits which is quite attractive in the current market.
You can minimise your risks by dividing your savings pool in 3-4 companies.
4. Invest in high dividend yielding stocks. Equity dividends from top quality companies with strong finances and good governance are a good alternative to diminishing yields on banks and Post Office deposits. Besides, annual dividend income of up to Rs 10 lakh is tax-free unlike interest on FDs that are taxed at your marginal rate of tax.
This however requires some research and homework as the dividend yield on common large caps stocks is very low. For example, BSE Sensex companies currently offer a dividend yield of just 0.73 percent, which means an annual dividend income of just Rs 773 for an investment of Rs 1 lakh in a portfolio that mirrors the Sensex.
However, there are many second and third tier companies with dividend yield of 5 percent or higher. For example, Coal India is currently trading at a dividend yield of 9 percent while Oil India and REC offers yields of 8 percent and more. Other companies with high dividend yield include Power Finance Corp, NHPC, Power Grid Corporation, Oracle Financial Services, Hindustan Zinc and Petronet LNG. While selecting a high dividend yield stocks always go for companies that have a growing business even if the yield is relatively low right now, say around 3 to 4 percent.
5. Raise your exposure to gold. Buying gold is an unconventional way to protect your savings but investment in the yellow metal is essential in the current economic environment. A forceful suppression in interest rates by policymakers despite higher inflation and rising yields globally is expected to result in even higher inflation and depreciation of Indian rupee.
This was witnessed on Wednesday when the RBI governor announced his plans to keep interest rates low. It led to an immediate depreciation in the rupee. As gold is an imported commodity and priced in the US dollar, gold prices increased in India. Historically gold has been a perfect hedge against inflation and rupee depreciation.
6. Take out a loan and invest in rental property. The advice may sound odd but desperate times call for desperate measures. Low interest rate means lower EMIs on home loans. This offers a good opportunity to take a home loan and buy a rental property in a popular residential district. Go for a ready to move-in 1BHK or 2BHK apartment in an area close to where you live right now. The current yields on rental properties are low at 2-3 percent but rental rates usually rise at the rate of 10 percent annually, which will translate into a yield of around 5 percent in the sixth year.
Moreover, you can save tax on the principal and interest paid on home loan. This way the post-tax yields on rental property and bank FDs may not be very different after 5 to 6 years.
So take out the calculator and start making savings and investment plans for a low interest regime and possibly a high inflation environment in the foreseeable future.
(Advice: This article is for information purpose only. Readers are advised to consult a certified financial advisor before making deposits or investment in any of the banks, funds or securities mentioned above.)
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).