How To Invest In A Rising Interest Rate Environment

Interest rates in India are moving up. After the Union Budget, the 10-year government security (G-Sec) touched the 6.95 per cent mark, though it has softened since then to the 6.66 per cent level (as on February 18). Nonetheless, the general expectation is that interest rates are likely to rise in 2022. This will have an impact on your investments.

- Sudipta Mitu

Why are yields rising?

Several factors are responsible for driving yields on the 10-year G-Sec up. In the budget, the government announced a higher borrowing programme for FY 22-23 than was expected by the bond market.

Prior to the budget, the market was expecting that the government would announce certain tax-related changes. These would have resulted in the inclusion of Indian bonds in international bond indexes. Such inclusion would have resulted in large inflow of foreign institutional investor (FII) money into the Indian debt market. This would have helped absorb the higher supply of government bonds. However, the finance minister did not make any such announcement. So, there is no certainty regarding when, or even if, the inclusion in international bond indexes will occur.

Brent crude is currently trading at around $94 per barrel. Even if prices soften, they are likely to remain in the $70-80 per barrel level and not go lower. High price of crude oil drives up transportation cost within the economy. This has a cascading impact on the prices of a wide variety of goods and services, resulting in high inflation in India.