Reserve Bank of India declared an increase in the policy rate on Wednesday morning. According to the governor of the RBI, the fight will go on against inflation while the growth of the country stays more resilient. Other important updates regarding the Indian economy were also made besides the hike in rate. As a matter of fact, the interest rate hiked 0.35%.
Repo and other increases in rate
By the term Repo rate, we refer to the rate at which commercial financial institutions borrow money by selling their securities to the RBI for maintaining liquidity in case there is any deficit of funds or because of some constitutional measures.
The MPC took a decision to increase the rates due to higher inflation. The repo rate was increased by RBI MPC to 6.25% by 35 bps, and it does not agree to minimize guard on inflation. The hike of the repo rate by 35 bps is in agreement with market expectations. This recent increase in rate has prompted the MPC to increase the repo rate by more than 200 basis points during the last 6 months.
Moreover, the MSF (marginal standing facility) and SDF (standing deposit facility) rates had been increased by the identical quantum to 6.50% and 6.00% respectively.
MPC voted 4-2 for staying focused on accommodation withdrawal, and therefore, inflation stays within the target while providing support to growth. The policy rate stays accommodative and adjusted for inflation.
Interest rate hiked 0.35%: Impact on equity investors
Sectors like real estate, banks, auto, and IT that happen to be interest rate sensitive declined following the repo rate hike of the RBI.
- When the interest rate hiked 0.35%, it was noted by the analysts that the policy announcement was according to the expectations for taming higher inflation.
- Analysts are of the notion that the fight of RBI against inflation will go on as India stays on a strong footing internationally.
- With this hike in rate, there has been a further decrease in the gap between interest rates and inflation. As per Ambit Asset Management, there might be an end to the rate hike cycle with a decrease in the gap between interest rates and inflation.
There has been a deterioration in the markets because of RBI’s hawkish tone.
Impact on loan borrowers
With the interest rate hiked 0.35%, we all expect an increase in borrowing expenses. As a result, personal loans, home loans, along with other credit facilities are going to cost more. Furthermore, loan borrowers who have floating rate payments of interest will be suffering more.
Impact on depositors
Here, we like to mention that the hike in interest rates has benefited the depositors since there has been an increase in the interest rates of bank deposits. Nevertheless, the transmission rate happens to be more sluggish.
Impact on debt mutual funds
There has been a tendency for bond yields to rise with the hike in interest rates. In turn, this has resulted in debt investment losses, particularly for those funds that are of longer duration since they are more sensitive to yield changes.
