‘RBI repo rate hike was on expected lines’

Adhil Shetty
Saturday, 4 August 2018

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The rate hike was on expected lines as the central bank has been mandated by the government to keep the inflation rate at 4 per cent. Inflation figures have exceeded 4 per cent mark for eight straight months. In June, inflation was at 5 per cent. Besides, the rupee has weakened, crude prices have remained volatile, and government expenditure is expected to rise with the upcoming Lok Sabha elections. Globally as well, higher oil prices and mounting trade tensions and tightening of financial conditions is keeping inflation levels high. However, the RBI continues to maintain a neutral stance on policy rates.

Impact on FDs

With an increase in policy rates, bank deposit rates are expected to rise as well. Just one day ago, the SBI hiked its deposit rates by 5 to 10 BPS. This means marginally higher interest earnings for customers opening fixed deposits with banks.

Impact on loans & advice to loan customers

Loans will get marginally costlier. In June, several leading banks including SBI had increased their MCLR. With the rate hike on Thursday, we could see further rate hikes. On a loan of Rs 1 lakh for 20 years at an interest rate of 8.5 per cent, the EMI is Rs 868. If the rate rises to 8.75 per cent, the EMI increases to 884. If the interest rate reaches 9 per cent, the EMI becomes Rs 900. In a rising rate scenario, it makes immense sense for customers repaying loans to make periodic principal pre-payments. This is especially helpful while you’re in the first half of your loan tenure. Pre-payments made in the first half have an immense impact in reducing your long-term interest outgo and thus ensuring savings.

Impact on equity & equity mutual funds

In recent years, we had seen heavy inflows into the equity markets corresponding with a steady drop in interest rates. The intrepid investor seeking higher returns chose equity in this period. As a result, mutual fund AUMs grew at a tremendous pace. The investor with a risk appetite can continue to invest in equity with the expectation of above-average returns in the long-term.

Impact on debt funds

Rising rates are bad news for investors in debt mutual funds. This is because the prices of bonds fall, and bring down the NAV of debt funds. It would be advisable for investors to steer clear of long-term debt funds and go for funds with shorter maturity periods. Short-term debt funds are expected to deliver lower volatility and low risk in this scenario.
Impact on small savings scheme

With two consecutive hikes in the repo rate, taking it to 6.50 per cent, there is now a heavy expectation of an increase in small savings returns. For the April to June quarter, the rates remained unchanged. Investors looking for risk-free, guaranteed returns may continue to invest in PPF, NSC, Sukanya Samriddhi, Post Office Savings etc. with the expectation of marginally higher returns in the coming days.

The writer is CEO, BankBazaar.

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