RBI stuns market experts, borrowers, depositors and industry policy repo rate Under the Liquidity Adjustment Facility (LAF) by 40 basis points to 4.40% with immediate effect.
In addition, the Permanent Deposit Facility (SDF) rate has been adjusted at 4.15%, and the Marginal Standing Facility (MSF) rate and the Bank Rate have been set at 4.65%.
Rising inflation following a steady rise in crude oil prices and uncertainty over the Russo-Ukraine war has been a cause for concern globally. It was expected that the RBI would increase the repo rates going forward, however, not so soon. But the RBI’s policy move is seen as inevitable ahead of the US Federal Reserve, which is yet to announce its policy today.
Prasenjit Basu, Chief Economist, ICICI Securities, said, “Inflationary pressures remain on the global side due to persistence of high crude oil prices and uncertainty over the length of the Russo-Ukraine war. The Chinese and Japanese currencies rose 4% and 6%. With a decline of .% respectively last month, emerging market currencies are under pressure. Although the rupee has depreciated only 1.1% in the last month, further downward pressure on the rupee will raise more concerns about imported inflation, hence the timely rate The increase was needed. The inevitable US rate hike is expected this week.”
Indranil Pan – Chief Economist, Yes Bank said, “The rationale for RBI’s hike today and away from the regular policy date is the growing concern over inflation – particularly with respect to food. Food inflation, higher than non-food inflation, Inflation expectations in India may change substantially.Governor pointed out that despite healthy domestic supplies, global high wheat prices are affecting domestic prices, while edible oil prices have risen due to restrictions on exports from Indonesia Producers can also pass on higher input costs to end-users as soon as possible. Thus, significant support for 40 bps growth has come from the understanding that inflation is here to stay. Timing of growth is also important as it seems This is before a possible 50-75 bps increase in the policy rate by the US Fed. This is probably to ensure that the INR is safe from any speculative attacks, and FX reserves in particular, irrespective of the LIC IPO. Their peak level is about US 30 billion below. In the financial year, India’s foreign exchange reserves have decreased by about $6.9 billion.”
Further, Shivam Bajaj, Founder and CEO, Avenor Capital said, “The hike in repo rate has been announced to mitigate the consequences of increase in inflation rates in the economy. As RBI announces withdrawal of its accommodative stance of course, this move may indicate RBI’s desire to further tighten liquidity in the times to come.”
But what is the point of hike in rates on fixed deposits?
Any change in RBI’s policy repo rate will have an impact on the lending and deposit rates of the bank. However, the quantum and timing of policy repo changes depend on the bank.
Whereas interest rates on term loans such as house, car, and personal among others are seen to be higher during the rise. This is the opposite for deposits as they tend to be attractive when interest rates rise – traditional schemes offer depositors a hefty return on their investments, especially in fixed deposits which are less risky than market instruments And also give guarantee returns.
Ajit Kabi, Banking Analyst, LKP Securities, said, “RBI has increased the repo rate by 40 bps and CRR by 50 bps till May 21, 2022 with immediate effect. The rate hike was the much-awaited factoring increase in food and general inflation. The rate hike is Liquidity in the economy as a whole is likely to shrink. According to banks, the cost of funds is likely to rise, so is the cost of deposits. This could translate into NIM pressure. However, a quick rise in the MCLR may control the NIM squeeze. can.”
As per RBI guidelines, the cost of deposit is to be calculated using the latest interest rate/card rate payable on current and savings deposits and fixed deposits of various maturities.
Anjana Potti, Partner, J Sagar Associates (JSA), said, “The geopolitical situation arising out of Russia’s invasion of Ukraine is weighing heavily on all markets. Market watchers around the world are watching the US Federal Reserve. , which is likely to announce a decision to hike rates later tonight. Central banks in many countries are raising rates to counter the effects of inflation. These borrowing costs to boost growth during the pandemic had fallen to record levels.”
Following this trend, RBI has increased its repo rate from 4.00% to 4.40% and according to JSA Partner this is likely to have a significant impact on the market, including:
1. Short-term deposits – Short and mid-term rates are always the fastest in response to any change in the interest rate cycle.
2. Retail Lending: Interest rates are likely to be higher for new borrowers. Existing borrowers with floating interest rates will also be affected.
Meanwhile, Chief Economist at ICICI Securities says, “The entire structure of interest rates will get tighter, which means loans will be costlier and fixed deposits more attractive. Equity markets will have a negative impact, especially since this is a surprising intra- Meeting was growth After sharp indications in last MPC meeting a month ago we were expecting hike in next MPC meeting but today’s move was bigger and earlier than expected.
In terms of credit growth, Ravi Subramaniam, MD and CEO, Shriram Housing Finance, said, “Today’s rate hike marks the end of the all-time low-interest-rate cycle seen in the past two years. As such, many banks are lowering money market rates. Benchmark lending rates are increasing tracking growth. While lending rates are unlikely to rise immediately as financial institutions will support growth and credit demand in Q1, borrowers need to take higher rates in FY23 Home demand loans remain buoyant, especially in the affordable housing segment and the immediate impact of the rate hike should be minimal on credit growth.”
Going ahead, Prasenjit Basu said, “If the Russo-Ukraine war continues beyond May and June, more rate hikes will be required. If the war ends soon (within next 5-6 weeks) Global inflation pressures will ease, easing pressure for further rate hikes.”
This means that fixed deposits have not become attractive with the latest 40 basis points hike in the policy repo rate. But there is still scope for further growth, which is likely to increase the demand for FDs.
“The long-term impact of this rate hike across all markets will be an interesting sight,” Bajaj said.
Fixed deposits have been prevalent in India for decades. It is like a paradise for investors who do not want to bear the risk and volatility on their money. They are not only favorable and one of the most preferred risk-free investments, but also offer tax benefits in the long run.