Every news paper and other media houses HAVE to do a story on ‘falling’ interest rates. Amusing. None of them will talk about ‘rising or constant’ REAL INTEREST rates!

(1)   The interest rates have seen a fall in recent times. Where do you see interest rates heading over the next one to two years?

The interest rates have fallen in recent times, does not mean we should call this as ‘falling interest times’. As more and more people get smarter and move money away from banks, banks will find that they do not have enough money to lend. They will stop buying government securities, and so the interest rates for the government will go up. If the economy grows at 9% for 3 years, there will be a huge demand for working capital and capital expansion. This will push interest rates up. I frankly do not know where the interest rates will be 2 years from now. Over the next one year it could fall by 100 basis points. 100 basis points is 1%. This is not too much.

(2)   Senior citizens and other who are dependent on fixed income products will see their incomes reduce in the coming months. What options do they have for investments if they wish to maintain their income levels?

Senior citizens and others who are dependent on fixed income products should understand that since the combo of RR and NaMo have been operating, REAL INTEREST has been going UP, not down. Real interest is “Nominal Interest MINUS  Inflation”. So the senior citizens should not do chest beating about falling interest rates, they should be rejoicing about rising REAL INTEREST rates. Asset allocation should not change because interest rate changes. However, senior citizens are well protected with a 9% interest in Senior Citizens Saving Scheme and of course the Public Provident fund. If they had invested in bond funds (or bonds instead of fixed deposits) their portfolio would appreciate and they could sell off some of the bonds. The interest rates on fixed bonds would be fixed and they would have got 9 or 9.6% interest when the interest rates are falling in newer instruments.

(3)  Going forward what kind of returns can they expect from the other investments?

This is a good question, and I have no answer. Talking of ‘expected’ returns from equity or real estate is naive. A short term number to these asset classes makes no sense.

(4)   Does the move push the ultra-cautious investor into the risky market of equity investments to maintain his or her income levels?

Cannot comment on this as long as people do not understand the difference between long term risk (inflation) and short term risk (volatility). So for a person who thinks equity is risky, he should be in debt and for a person like me who thinks debt is risky, I remain in equity. Touche’.