Are interest rates headed even lower with demonetization?

I had written sometime back that interest rates are headed lower and so far that trajectory has held. With recent demonetization, the biggest impact will be on interest rates and don’t be surprised if 1 year FD fetches you only 5.5 to 6% from the current 7%.

With lots of deposits coming into the system and Govt. able to reduce its fiscal deficit, there will be a lot of downward pressure on the interest rates. With inflation around 4%, the real rate of interest in the economy should be around 5.5%. So if you are a saver, who believes in FD- you are on for a shock in the coming times as your post tax returns will fall to 3-4%.( which implies that it will take you 15-20 years to double your money!)

At the same time, lower interest rates will be good for the economy and might start a permanent bull market in equities. So it might be prudent to take a bit of risk to enhance your returns by investing in equity market.

Not taking any risk might turn out to be the biggest risk! So make volatility your friend and take the plunge.


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