In yesterday’s Monetary Policy Committee meeting, the RBI hiked Policy Rates by 50 basis points (0.5 per cent). This was a widely anticipated move, especially in light of the central bank’s decision to implement an “out of turn” rate hike of 40 bps last month in light of steadily rising inflation.
In an effort to bring down prices, the central government had implemented a slew of proactive measures last month – including the excise duty cut on petrol and diesel prices, and the ban on wheat exports. However, keeping in mind the current geopolitical scenario and steadily rising crude prices the RBI stated that “upside risks to inflation materialised faster than expected”, and increased its inflation estimate for FY23 to 6.7 per cent vs 5.7 per cent earlier. That’s quite a steep hike in the central bank projections, and one can only hope that they did not leave the liquidity tap open for too long.
Unsurprisingly, neither debt nor equity markets witnessed a strong reaction to the news, as this move was expected. In fact, the 10-year yield had already run up to 7.5 per cent levels ahead of the meeting, and equities had been volatile and range bound in the days leading up to the decision. The NIFTY corrected by around 60 points, and opened marginally higher on Thursday morning.
With the cumulative rate hike now 90 basis points over the past couple of months, we may well see another rate hike of a similar quantum in the next policy – considering that the committee is now unanimously focused on “withdrawal of accommodation”.
What does this mean for your personal finances?
First, you should remain cautious with respect to long term debt. The interest rate risks are fairly high, and although the spread between the repo and the 10-year yield is much higher than the long-term average, yields may go up by another 50-75 bps from current levels if sentiment remains weak. For your short to medium term investments, go for medium duration debt funds, floating rate funds or arbitrage funds.
Second, increased borrowing costs could impact corporate profitability in the near term, so we should be prepared for equity markets to remain volatile and range bound for the remainder of 2022. Economic activity does remain strong despite high inflation, so the push and pull forces will continue to cancel each other out. Don’t try to trade the markets in 2022. Instead, stay disciplined and continue investing according to your financial goals.
And lastly, expect home loans to get more costly, in a hurry. Banks are notorious for being slow when it comes to passing on rate cuts but swift when it comes to passing on rate hikes. If you’re just started a home loan, be prepared to pay 10-15 per cent higher EMI’s very soon.