How borrowers & investors can gain from falling interest rates

If there is one thing that investors, businessmen and consumers want right now, it is a cut in interest rates. When RBI governor D Subbarao unveils the monetary policy on 29 January, it is likely that he will oblige the teeming masses. In fact, a rate cut is almost a foregone conclusion, though the quantum of the rate cut is still a subject of intense speculation.
Till about a fortnight ago, there were rumours that easing inflation will nudge the RBI to affect a cut of 50 basis points. Some were optimistic that rates will be cut by 100 basis points. However, the expectations were later revised to a 25 basis point reduction.
How will a rate cut affect you as an investor and a borrower? ET Wealth reached out to experts to analyse how lower interest rates will impact your investments.
We analysed the products and sectors that will benefit if rates are eased. Which companies are best placed to gain from a benign rate structure? We also looked at the strategy you should adopt at this juncture, both as an investor and a borrower.
For now, a large section of the investor community has already priced in the rate cut. Over the past few weeks, the yield of the benchmark 10-year government bond has dropped significantly (see chart), reflecting the change in sentiment. Is this optimism justified? Some experts reckon that the stage is set for a decisive move from the central bank. Inflation is now within touching distance of the RBI's stated comfort zone of around 7%. The government has also taken steps to manage the fiscal situation.
Rahul Goswami, CIO, fixed income, ICICI Prudential AMC, expects the RBI to cut rates by 50-75 basis points over the next three months. The 10-year bond yield is likely to be in the 7.55-8.15% range during this period. Says Amit Tripathi, head, fixed income, Reliance Capital Asset Management: "Rates could be cut by 50 basis points over the next three months. Further action by the RBI will depend on how macro data pans out. It is likely to come down by 75-100 basis points over the next 12 months."