If you have invested in debt funds, the possibility of adverse mark-to-market impact is lower. If you have taken a home loan, your EMI is not going up further. The impactThe markets have reacted positively to the pause, against expectations/apprehensions of a rate hike. It all depends on inflation, global/ domestic uncertainty, growth prospects and finally RBI’s reading of the situation.ĪLSO READ: Equity or debt funds, SIP is an all-weather friend But the timing of rate cuts going forward, and the extent, is anyone’s call. It would happen, as cycles are the only thing constant in markets. The chatter in the market now is about interest rate cuts, going forward. The central target of the RBI is 4 percent CPI inflation but given the globally high interest rates something little north of 5 percent should be acceptable for the time being.ĪLSO READ: Small-saving schemes turn attractive after March-end rate hike: Here’s what you should do The US dollar is softening, measured by DXY our current account deficit (CAD) is improving and INR is stable, within 82 to the USD as we write. European Central Bank/ other Euro-area countries are expected to hike rates for some more time. China and Japan are yet to hike interest rates. Globally, the US Federal Reserve is expected to hike the rate at the most one more time by 25 basis points. Inflation is expected to ease from 6.52 percent of January / 6.44 percent of February 2023 to 5.1 percent in April-June 2023 and 5.2 percent in January-March 2024. In a situation when the RBI has a clear communication that the policy stance is “withdrawal of accommodation”, which is a bias towards interest rate hikes, one cannot thump the chest and say rate hikes are over. It may sound dichotomous but we may have seen the last rate hike of this cycle on 8 February 2023. From that perspective, it is a positive 2 percent.ĪLSO READ: RBI pauses rate hikes. The 1-year Treasury Bill yield is approximately 7.2 percent. Inflation is measured over a 1-year period, and from that perspective, it should be seen against a 1-year rate. If we take the RBI repo rate of 6.5 percent and the 1-year ahead CPI projection, the real interest rate is positive 1.3 percent. On the other hand, interest rates should not be restrictive and come in the way of growth. On one hand, India is the fastest-growing major economy in the world. The range of growth rate projections of economists for FY24 ranges from 5.1 percent to 6.5 percent. However, many economists are projecting a lower growth rate. Coming to growth, RBI projects GDP growth at 6.5 percent for the financial year 2023-24. Rates should be high enough to fight inflation but low enough not to hamper the growth of the economy. That is, there has to be a balancing act between inflation control and promoting growth, in the context of fine-tuning interest rates. While inflation control is the priority for the RBI, the growth of the economy also needs to be taken care of. RBI projections on inflation are 5.1 percent for April-June 2023, 5.4 percent for July-September 2023, 5.4 percent for October-December 2023 and 5.2 percent for January-March 2024. While most people were reacting to the inflation data of January and February, the projections are much softer. The RBI governor Shaktikanta Das clarified that the central bank remains watchful and if required- if inflation is on the higher side- they will hike again. Today, the RBI MPC paused on rate action, only for this meeting, to assess the impact of the 2.9 percentage points rate hike effected already. Hence, overall, the rate hike has been 2.90 percentage points. Earlier there was a hike of 40 basis points during the changeover. The lower end of the RBI rate corridor was reverse repo earlier, now changed to Standing Deposit Facility. The effective rate hike has been even higher. Since the start of the current rate hike cycle, that is, since, the signal repo rate has been hiked by 2.5 percentage points. Then why the pause, and what did the RBI say? The major reason for the market expectation (or apprehension) was that for two consecutive months, January and February 2023, inflation was higher than 6 percent, the upper tolerance band. Prior to the policy review, the majority of the market was pencilling in a policy interest rate hike of 25 basis points. As the six wise people comprising the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) met and decided to hold interest rates, the market was surprised.
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