Now if we know that banks have a lot of money, then obviously RBI would like them to lend the money to borrowers rather than keep it with themselves (or depositing it with RBI). Had the banks given away all the money to borrowers and then faced a liquidity problem, the RBI may have reduced interest rates even more. But that does not seem to be the case. So chances are that we are at the bottom of the interest rate cycle or very near to the bottom (read: interest rates are likely to move upwards from here).

This logic also explains (partly) why the NAV of the scheme shown in Table 1 is sliding since January 2009. So going back to the basics we now know that this is definitely not the time to invest in long-term bond funds.

Also an empirical way of knowing when interest rates have bottomed or are nearing the bottom is when we start getting calls from banks for taking loans in general and 'personal loans' in particular.

When banks have a lot of cash, they want to disburse it ASAP and at as high rates as possible. Thus they start making offers to us.

Obviously there is more supply of money than demand and hence money is available cheap (that is low interest rates for us!). Personal loans are the riskiest from the bank's point of view and hence they charge a very high rate of interest on them. What will happen as more and more people (individuals and corporates) start taking loans from the banks?

The demand for money will start going up and the supply will start reducing resulting in higher cost of money for us. Thus rising interest rates!