When interest rates go up, you know one thing for sure – it will come down also. Now inflation figures are likely to be a little lower (base effect), and there will be pressure on RBI to cut rates. In the informal market (ask the builders!) interest rates are still hovering around the 25%p.a. + ……..and it is not showing any signs of coming down.

Many people including NRIs have locked in their money at these high rates and this is coupled with a dramatic fall in demand for loans.

Is this a time to be investing in long term bond funds (like Gilts?) or will the interest rates still go up?

I do not know. I also know that there are only 2 types of people – those who know that they do not know and those who do not know that they do not know.

The government has no capability to reduce expenses. The expenditure on defense, on insurgency, etc. are of course not controllable, but even the exp on the Nehru, Indira, Rajiv programs are not controllable. This will mean a tremendous amount of borrowing by the government. How can businesses compete in the world markets borrowing money at 12% p.a. beats me. Recently Tata capital has reduced interest rates from 12% to 10.5% – it will be interesting to see the response.  In a market when I can get a bond portfolio return of 10.5% coupon I will not want a concentrated risk even if it is Tatas.

I see builders willing to borrow at 28% p.a. and the less reputed ones even at rates north of that….

However if you are happy with a current yield of 10% and do not mind a short term fall in the value of the portfolio (and realise that you cannot catch tops and bottoms) it is not a bad idea to put some money in long funds.

Normally you turn to Dynamic Bond funds to see what is the fund manager view. Do not try to do that, the view is like a mess out there….and I have no phone number of a good debt fund manager with whom I can talk…sad but true.