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India’s Shrinking Business Cycle


If ywealthymatters.comou have a ladder of fixed income instruments  or are looking to take on debt,it helps to be able to have a feel for the interest rate cycle.I came across come interesting inputs to help in this effort in yesterday’s newspaper.

The chief takeaways of this article are:

1.By watching the long-term investments in infrastructure,maybe 10-15 years into the future,we can call the GDP growth rate.At present it is  likely to be 5-7 %.

2.The current RBI governor has commented that the potential growth output frontier has shrunk to about 7.5%.

3.During the growth phase of the business cycle,when the growth reaches,85% of the capacity,which is about 6.5% growth,RBI will likely apply the brakes.

4..The business cycle time period has reduced from a previous  7-8 years to 1.5-2 years.

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Laddering


wealthymatters.comNormally,for fixed income instruments , the interest rates corresponding to longer terms are higher than those for shorter terms.However,locking in money for longer periods is not always an option.One way of ensuring a greater degree of liquidity while taking advantage of the higher rates offered for the longer tenures is laddering.

If you want to create a 5 year ladder you could buy a 1year, 2year, 3year,4year and 5year instrument .Then after the first year,renew the matured 1 year instrument for a term of 5 years.Then the following year do the same with the matured 2year instrument.Continue the process.

Laddering ensures that at least some of the higher interest rates are locked in and that the average rate is higher than the rates at the lowest point in the interest rate cycle.

If you are drawing an income from your fixed income instruments say to pay or part pay you a pension,your EMIs,a tution fee or get some passive income,laddering smoothes out the variations.

Laddering is possible with bonds,NCDs,FDs,CDs etc.

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