The Falling Interest Rates and What It Means For Your Money
Interest rates are an important indicator of the economic activity of a country. Interest rates have a direct effect on people’s consumption and hence can impact the everyday life of individuals.
Interest rate cuts impact borrowers positively ( they get loans at lower interests) but the depositors, savers, investors (the deposits made in banks also earn low-interest rates) and lenders ( due to falling interest rates they lend at low rates too) are negatively impacted.
Interest rates have however fallen to an all-time low, standing at 4.4% on Fixed Deposits. This is in comparison to 5.2 which was the average going rate earlier this year. While this is a shocker in itself, the rising inflation rate at 7.66% in 2019 just goes to show that your average Fixed Deposit will only make you poorer over the years.
So let's be smart about money!
Falling interest rates makes borrowing affordable- Loans or the cost of borrowing funds become cheaper. This leads to an increase in people availing home loans, auto loans among other loans to fund small or large credit-based purchases.
Such purchases lead to demand which in turn helps the overall economy. Inversely, rising interest rates dampen consumption due to the higher cost of borrowing. Savers benefit from such scenarios as they get more attractive interests on their savings and deposits.
You need to look for better investments: As women, we tend to play safe. But can we afford to? Nope. Not anymore. We need to be smart about our money. But then, where do we begin? - One way is to go through all the options that you have. The other, is to find a space that sifts through all the content and provides you with only the best options that suit you. (PS: check out Basis)
Understand your risk appetite: There's no point looking at what others are doing. Everyone's relationship with their money is personal. Understanding how much risk you are willing to take, will give you a great starting point to safeguard your money.
Ask an expert for help: Come on, there's no shame in that! No, we're not saying that ask your friends. They're not the experts. But what we're saying is, actually sit down with an expert and understand your finances. Understand yourself, and your goals. This will make your journey much smoother.
But why are interest rates falling?
Interest rates have been on a steady decline in the last 3-4 years. This is primarily due to fragile economic conditions and the ensuing rate cuts by central banks across the globe to stimulate the economy, especially in the last few months. This has led to excess liquidity making access to funds more affordable. This trend has been noticed since the demonetization in 2016.
The decline had flattened for some time but accelerated again due to the COVID-19 situation. The pandemic drove central banks across the globe to lower interest rates to help stimulate economic activity. As a result, many countries are witnessing near zero or negative interest rates.
Falling interest rates are a dampener for savers and investors. It leads to a drop in yields/ returns on investment in deposits such as savings banks and fixed deposits. In the current situation, most banks have reduced their interest rates on savings accounts. Most of the “safe” investment options such as fixed deposits and bonds also get affected negatively as there is a drop in interest rates for fixed deposits and a drop in bond rates.
Consequently, people who depend on these instruments for their income would witness a drop in their income. In addition, the growth in savings is also subdued due to lower interest and bond rates.
Although the savers and investors will see a drop in income and returns as a result of falling interest rates, there are a few options across bonds, deposits and fixed income mutual funds that can benefit them in these times.
What can I do to stay ahead?
Look for alternative investment instruments: This might be a good time for you to explore new instruments for investment. If you have been saving in Fixed or Recurring deposits for long, try pivoting to Mutual Funds, Bonds and other deposits. As women, we tend to always choose the safer investment routes, but this might not always work in our favour. This was why we created a product like Basis. Here, you can make your own investment decisions based on expert advise in the Advisory section. Depending on your needs, you can choose instruments that work for you. Download the Basis app now!
Basis is a first-of-its-kind platform, aimed at enabling women to achieve financial independence through expert advice, in-app knowledge Boosters and supportive communities.