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Fixed Income

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What affects interest rates?

The factors affecting interest rates are largely macro-economic in nature:

• Demand/supply of money- When economic growth is high, demand for money increases, pushing the interest rates up and vice versa.

• Government borrowing and fiscal deficit- Since the government is the biggest borrower in the debt market, the level of borrowing also determines the interest rates. On the other hand, supply of money is controlled by the central bank by either printing more notes or through its Open Market Operations (OMO).

• RBI- RBI can change the key rates (CRR, SLR and bank rates) depending on the state of the economy or to combat inflation. RBI fixes the bank rate which forms the basis of the structure of interest rates and the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), which determine the availability of credit & the level of money supply in the economy.

Keywords

Fixed Income, Interest Rates

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