On Wednesday, ahead of the US Fed rate hike, the Reserve Bank of India (RBI) unanimously voted to increase the repo rate by 40 basis points to 4.40 per cent, as it continues with the accommodative policy stance to mitigate India’s inflation trajectory. The repo rate now stands at 4.40 per cent. This surprise hike has left the market bleeding with Sensex nosediving below the 56,000 mark and Nifty closing below 16,700.
The Monetary Policy Committee, however, has decided to focus on withdrawal of accommodation while remaining accommodative. The objective is to keep the inflation within target while supporting growth. Since May 2020, the RBI had not changed the repo rate. The last repo rate hike was recorded in August 2018.
According to RBI’s announcements, the hike has been implemented with immediate effect. Additionally, the Cash Reserve Ratio (CRR) has also been hiked by 50 bps that will further increase pressure on interest rates. The borrowers are advised to prepare for an increased EMI burden and FD investors can hope for better returns on new FDs. The hike could also lead to a start of an interest rate hike cycle.
Whenever the interest rate cycle makes a U-turn from bottom, it typically increases the short to medium term interest rates. Subsequently, a longer time is taken as far as the long-term interest rate is concerned. Thus, the bank FD depositors are advised to lock deposits for a longer term at a prevalent lower rate and wait till the deposit rates rises again, and if someone is planning to book an FD now, it is better to choose a shorter tenure so that they are not locked on lower rate for a long time.
Consequently, the hike in the repo rate would also show its impact on loan borrowers as the repo rate will soon begin translating into higher lending rates for both new as well as existing borrowers. If someone is planning to take a loan, it is better to take it as soon as possible as the hiked repo rate would lead to an eventual hike in loan interest rates as well.