Your Money: Fingers crossed, rate hikes are over

By Joydeep Sen

The last time the Reserve Bank of India (RBI) increased the repo rate was on February 8, 2023, when it raised it from 6.25% to 6.5%. In the latest policy review on April 6, 2023, there was a pause on rate hikes and the repo rate remains at 6.5%. The next review is scheduled for June 8, 2023. The expectation is that it will not tinker with the rate.

However, apart from rate action per se, there is a ‘stance’ to policy rate decisions. There are three usual approaches: hawkish, neutral and dovish. Hawkish stance means bias towards increasing interest rates to control inflation and dovish means bias towards cutting rates to support the growth of the economy. The stance adopted by the MPC is ‘withdrawal of accommodation’. This is possibly somewhere between neutral and hawkish.

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In the forthcoming policy review, there is a case for change of stance from ‘withdrawal of accommodation’ to neutral. The rationale is, the backdrop in which the stance was changed from neutral, has changed. The stance was changed in May 2022, when the RBI MPC started hiking the repo rate from 4%. The repo rate has moved up to 6.5%. On the other hand, inflation has eased. CPI inflation in April 2023 was 4.7%, which is much lower than earlier and within the RBI tolerance band of 4% to 6%. RBI’s projection of CPI inflation for 2023-24 is 5.2% and that for 2024-25 is 4.4%. Given that inflation expectation is very much in the tolerance band and nearer to the target of 4%, we can come back to a neutral stance.

Investment portfolio

What does it mean for you and me? For your investment portfolio, interest rates not going up is a positive. Money being available is a positive for the equity market. It is a positive for the bond market as well, because interest rates and bond prices move inversely. When interest rates are not moving up, bond prices or NAVs of bond funds are not coming down.

There are other positives as well. When interest rates move up, your housing loan EMIs move up in tandem. For quite some time, banks have been disbursing floating rate home loans, not fixed rate ones. The rate on a fixed rate home loan would have been much on the higher side, which is why banks are not even displaying those numbers.

Once a bank gives out a fixed rate loan, it is unprotected on its margin if interest rates move up over that long period of time. Floating rate loans are benchmarked to an external rate, called external benchmark linked rate. The reset of a floating rate loan, when interest rates are moving up, happens instantly, as it is either the RBI repo rate or a Treasury Bill traded level in the market.

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It is expected that the RBI rate hike cycle is over and home loan borrowers can be comfortable to that extent, after bearing the hit over the last one year or so. Having said that, if and when there is change of stance from the RBI MPC from ‘withdrawal of accommodation’ to neutral, borrowers can heave a sigh of relief.

The writer is a corporate trainer and an author