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Neutral interest rate cycle.

RBI in their recent credit policy stated that, they will go “Neutral” as against the “Accomodative” stand that they were in, while this move triggered a huge surge in bond yields, affecting the debt investors who were taken by surprise. This move has made fund managers to shift their stance and look for lower duration’s in their investments. And this will take some time to settle. The bond yield charts show that, though there might not be a bigger damage coming, chances of Bond yields reaching 7.00 which there are some rumors about have a fairly good chance. And from there, it should take a fall.

 

While, that is the region where the opportunity will come in, interest rate cycle will bottom out and then our economy will witness interest rate rise cycle. Now, this throws up a lot more interesting thought. If interest rates move up, what will happen to the economy which is soon to settle into the lower single digit interest regime, (an expectation), if we have to become an economy that is at par with the western peers. Will this mean the transformation will take longer period?

As of now the questions don’t get a clear answer, probably the up cycle can also be the reason for the end of bigger growth for India.

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