It's time to make that debt wish

The credit policy announced on Tuesday has sent out some signals so far as interest rates are concerned. But what are they? More important, what does it mean so far as the lay investor is concerned. For them the bottomline is simply - should I invest in debt or not? (whether through mutual funds or directly).

Okay, lets take a quick look at what the credit policy is signalling - going by the explanation offered by the governor Y V Reddy. Bank rate has been left untouched. So has the cash reserve ratio (CRR).

Without getting into tedious explanations, the bank rate is usually a signaller of long-term interest rate trends. Which is as much what the governor said.

Any changes (hikes) in the bank rate and the next morning there would have been a unanimous hike in lending rates across all banks. So also with the CRR, though when it was increased earlier this year there was no such reaction as nobody wanted to squeeze the growing demand in the economy.

However, the repo rate has been increased by 0.25 per cent. The repo rate is at which the central bank lends to other banks. This is usually a short term borrowing by banks (largely overnight), which means that a short-term hike in rates can be expected.

So when both are coupled - we have a largely stable interest rate regime with a short term spike.

If interest rates are rising in the short term, it means bond prices are going down. So this is a good time to invest in debt. Those who are new can get into it while those who are already in it can make additional investments. Sandesh Kirkire, chief of fixed income in Kotak Mutual Fund days, "this is a good time to invest in debt."

Tridib Pathak, chief investment officer at Cholamandalam Mutual Fund said, "Investing in debt funds depends upon the kind of time horizon that investors are looking at." For those looking at short term investments, he recommends floating rate and liquid funds.

But for those with an investment horizon of between one and two years and those who are averse to equities, he says that normal bond funds would be the right investment vehicle. In the short term there will be volatility which will be ironed out over the long run.

"In the long run if secondary market yields go up then investors can get returns between 5.5 per cent and 6 per cent," said Pathak.

And in the longer term when rates go down (which everyone agrees that it should) there will be significant capital appreciation. So should investors wait a while before jumping on to the investment wagon in order to let the financial sector give effect to hikes?

"I would not advise investors trying to time the market," said Pathak, adding that this was true of any markets.

The broad indications are that nothing is going to happen during the festive season. So do not wait for the festive season to end, grab your cheque book right away!