RBI hike interest rate by 0.5%: What is the impact on you?

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RBI Repo Rate Today: What Happens When RBI Hikes Repo Rates?

RBI was expected to increase policy rates by 35 to 50 bps to control inflation. On Friday morning, the Reserve Bank of India (RBI) decided to raise the interest rate by 50 basis points. Let us look at all the details:

RBI Monetary Policy Highlights: Repo Rate Increase 

In line with most experts, the RBI Monetary Policy Committee has hiked the repo rate by 50 basis points to 5.9%. In the last five months, we have seen a repo rate increase of 190 bps. 

The SDF (Standing Deposit Facility) rate stands adjusted to 5.65%. MSF (Marginal Standing Facility) and Bank Rate changed to 6.15% from 5.65%. RBI Governor Das retained the stance on the withdrawal of accommodation.

RBI Monetary Policy Today: Update on Inflation

The recent correction in global commodity prices, if sustained, may ease cost pressures in the coming months. Today, inflation is hovering around 7%, and RBI expects it to remain elevated at 6% in the second half of the year.

CPI Inflation projection for FY23 has been retained at 6.7%. Edible oil price pressures were expected to remain contained. Selling prices may temper ahead with a slide in costs of commodities, and metals. RBI governor also added that upside risks remain to food prices, and delayed withdrawal of monsoon was impacting vegetable prices.

RBI on Indian Rupee

RBI governor said that Indian Rupee has fallen 7.4% v/s the US dollar from April 2022. As per them, the currency has depreciated in an orderly manner and has fared much better than several other currencies. The governor said that the Rupee is a freely floating currency, and the RBI doesn't have a fixed exchange rate in mind. 

The central bank intervenes to adjust only volatility in the market and the intervention is based on evolving situations, and the forward guidance may destabilize capital markets.

RBI Monetary Policy: GDP Projection

RBI Governor Shaktikanta Das said that the real GDP for FY23 was projected at 7%. The quarter-wise growth projection stood at:

  • Q2FY23 GDP growth at 6.3%,
  • Q3FY23 at 4.6%
  • Q4FY23 at 4.6%

RBI Repo Rate Today: Update on declining Forex reserves

India’s foreign exchange reserves stand at $537.5 billion. The RBI governor said that about 67% of the decline in India's forex reserves in FY23 is due to valuation changes resulting from dollar appreciation. There was an accretion of $4.6 billion to the dollar reserves during the current financial year. Interventions in the forex market are based on the assessment of prevailing market conditions and RBI has been judicious in its intervention in the forex market.

RBI Monetary Policy: Other important updates

  • RBI proposes to extend rules that apply online payment aggregators to offline payment aggregators also.
  • Regional Rural Banks (RRBs) are currently allowed to provide Internet Banking facilities to their customers, subject to fulfillment of certain criteria. To promote the spread of digital banking in rural areas, these criteria are being rationalized. 
  • RBI has decided to introduce a framework for the securitization of stressed assets. This will provide an alternative mechanism for the securitization of NPAs, in addition to the existing ARC route.
  • Foreign portfolio investors (FPIs) have returned to the domestic market with a net inflow of US$ 7.5 billion during July-September after an outflow for nine consecutive months

What does the RBI’s repo rate increase mean for you?

Impact on debt mutual funds

When yield rises, bond prices fall, which reduces the profitability from debt investments. This forces debt investors to pull their money out of the market and wait until the bond price rises so that they can earn more. Hence, debt funds may face short to medium term volatility.

  • Due to their higher sensitivity to yield changes, longer duration funds will see a higher impact of yield changes.

What should you do now?

  • Stick to high-quality AAA-rated low-duration funds and bonds. Prefer safety over high yields in this volatile market. 
  • There is a significant tax advantage in holding a debt fund for more than 3 years. For a more than 3-year investment horizon, an investor should prefer short duration (duration < 3) fixed income instruments over a long duration. 
  • The interest rates are expected to move higher over the next 3-6 months. Shorter duration funds are likely to outperform in this scenario, given their lower sensitivity to interest rate changes as compared to long-duration funds.

Effect on Loans and Other Credit Instruments

  • The increase in repo rate will directly affect the banks lending rates.  In order to compensate for the higher repo rate, the banks are likely to increase the interest rate they charge from borrowers. Hence, home loans, personal loans and other credit facilities are going to get costlier. This will majorly affect home loan borrowers who have opted for floating interest rates. 

How Will Deposit Rates Change?

  • Increase in repo rate is not seen as something desirable by investors. However, one positive thing that usually happens when repo rate rises is an increase in interest rates offered in bank deposits. However, the transmission of interest rate hike may take a bit longer. Eventually, it is expected that the banks will increase interest rates on deposits as well.
  • What is RBI repo rate?

  • What happens when repo rate increases?

  • What is the current RBI monetary policy?