ICRA Lanka: Low-interest rates, Who are the winners and losers?

Key Takeaways

§  Price increase in treasuries have helped primary dealers and banks to realize substantial capital gains as much as 40-to-60 percent from March 2020 price levels.

§  Equities attracted a large number of local investors, as historically low interest rates on fixed income assets prompted them to seek alternative investments. Investors saw their portfolio valuations growing by at least 90% from the precrisis level by the end of January this year.

§  Declining yields on fixed deposits helped mutual funds industry’s Asset Under Management (AUM) to grow exponentially to 97% by March this year making it one of the biggest winners from the current low interest rates.

§  Share of institutional time deposits have increased as low interest rates have driven retail depositors to higher yielding assets. More risk averse depositors such as retirees have opted to stay put and lower real returns have undoubtedly affected their welfare level. 

§  Lower interest rates have pushed the demand for housing loans up, resulting in house prices soaring by over 20% from the 2Q 2020 level outpacing apartment and land prices.

§  Large corporates and financial intuitions are showing growing interest in issuing debt instruments and locking up their funding needs at the current low interest rates. Roughly LKR 117 Bn debt instruments have been rated between 2Q 2020 to 1Q 2021 period.