What Should Be Your Investment Strategy Amidst The Rising Interest Rates?

While increasing rates might help fight inflation, it might dampen growth and the financial market mood.

The Rising Interest Rates

The Bank of England and the US Federal Reserve have raised interest rates by 0.75%. Inflation has reached a multi-decade high, and the central banks have been forced to increase the rates to control it. It means the rates could go even higher as time goes by. The Reserve Bank of India (RBI) has raised the rates four times this fiscal year to control inflation. While increasing rates might help fight inflation, it might also dampen growth and the financial market mood. 

Fund managers believed the Federal Reserve would provide a dovish tone, but that did not happen. The dollar strengthened, and the Rupee weakened after the Fed announcement. Fund managers believe the future hikes might be smaller but will remain. The rate tightening might continue worldwide for quite some time. 

Read: How does inflation in the US affect India?

Inflation Targets Not Met

Tata Mutual Fund's Akhil Mittal, Fund Manager, believes the situation will keep the central banks tightened worldwide. He believes the RBI will increase the repo rate by 6.75 percent as the fulcrum terminal rate. Our current account is in deficit, and the dollar is strengthening. He does not think the RBI would consider lowering its stance as it could create a speculative risk in the INR. The RBI has not been able to reach the target zone for inflation in the last three quarters consecutively, and he expects the RBI to tighten policies to meet inflation targets. He believes the yields could harden by 15-25 bps in the next few months. 

The expert also believes the hardening of the yield could lead to an MTM impact in the near term on debt investors. However, it might provide accruals far better than before to new and existing investors as the yield moves upward.

Read: Where is the Rupee headed, and how will it impact us?

Markets Already Ready 

Other experts believe that the Indian markets have already factored in the increases, and even if the RBI follows the Fed, it will not make much of an impact. Fund managers expect the markets to be volatile for some time and recommend exercising caution.

Trust Mutual Fund's Chief Business Officer, Ajaykumar Gupta, believes the RBI might not react to the Fed hike in the US. RBI talked about being driven by data and will look to support economic growth and contain inflation. He recommends investors stay invested for the long term as the markets could remain volatile in the near future. 

Suresh Sadagopan, Ladder7 Financial Advisors, Chief Planner, believes investors should continue carefully and think long and hard before investing. He recommends having a contingency fund and saving money for any goals they might want to achieve. He recommends sticking to debt funds (short-term) and target maturity plans. 

We recommend the investors remember how unpredictable the scenario is and we have no control. A global recession might affect us, and the future is uncertain. You must set asset allocation and goals accordingly. It would be best if you stuck to your long-term goals, as the current situation is likely temporary. 

Interest Rates Might Ultimately Be Higher Than Predicted

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.


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