RBI raises repo rate as planned, but does not indicate an end to increases.

 RBI raises repo rate as planned, but does not indicate an end to increases.

In spite of the fact that inflation has decreased, it is still higher than the RBI's target, therefore the Monetary Policy Committee of the RBI has left the door open for rate increases in the future. After the most recent boost, the portfolio returns of debt mutual funds will slightly increase.

RBI MPC rate increase

The Reserve Bank of India's Monetary Policy Committee (MPC), which consists of six knowledgeable individuals, convened to discuss and set the nation's interest rates.

On the morning of February 8, the RBI governor grinned as he announced the outcome on television. The majority of market participants anticipated a rise in interest rates of 25 basis points, or 0.25 percent. And indeed, that is what took place.

The interest rate increase we're discussing is on the repo rate, which is the rate at which, if necessary, the Reserve Bank of India funds banks once per day. It went up to 6.5 percent from 6.25 percent. The entire economy's interest rates are based on this rate. A rise in the repo rate today will cause banks' lending and deposit rates to rise the next day.

It was anticipated the direction the RBI would go at its next meeting on April 6, 2023, and whether there were any signs that it was relaxing its position. RBI maintained its options on that. open.

Argument

Because of the decline in inflation, the market was anticipating indications of a pause in interest rate increases. Inflation of consumer prices, which was 7.79% in April 2022, will decline to 5.72% in December 2022. Right present, real interest rates are rising. The repo rate of the RBI is currently 6.25 percent and will increase to 6.5 percent going forward, which is higher than the projected CPI inflation rate of 5.72 percent for December 2022. The State Bank of India offers a 6.75 percent interest rate on one-year deposits.

Possible Causes Despite the fact that inflation has decreased, it is still higher than the RBI's target, therefore the MPC has left the door open for future rate increases. 4% was the initial objective for CPI inflation. There was uproar earlier when inflation continuously exceeded 6%, which is the upper limit of the RBI's tolerance band.


Additionally, the RBI makes reference to a measure of core inflation, which is inflation other than that related to food and fuel. Core inflation, which was over 6% in December 2022, is still high.


Figures from the most recent review

The CPI inflation forecast for the current quarter, which runs from January to March 2023, is 5.7%. In the next quarter, from April to June 2023, it is anticipated to decrease to 5%. % for the entire fiscal year 2023–2024.

Regardless, it will be less than the current fiscal year, which had an average annual growth rate of 6.8% from April to December 2022. The predicted GDP growth for the upcoming fiscal year 2023–2024 is 6.4%.
conceivable future course

Regarding the setting of policy rates, the RBI has maintained its position of "withholding accommodation." It is implied that it will be biassed in favour of raising interest rates. Nevertheless, notwithstanding the official position, it is unlikely to proceed. The rate of inflation has decreased and is predicted to do so further. Positive real interest rates are present.

The RBI may continue to withdraw from the housing market if inflation surprises in the negative. This would be because of "provisioning."

Interest rates should be appropriate to manage inflation but not excessively high to boost growth given rumours of a global recession, which will have some effect on India's growth as well.

Four out of the MPC's six members opted to keep the policy of rate increases and withdrawals in place. The Governor shall have a casting vote at the next meeting on April 6, 2023, in the event that one of the members alters his vote and there is a tie.


effect on you

In my earlier writings, I made sure to underline how now is a wonderful moment to invest in debt funds. Debt funds' portfolio returns are substantially better than they were two years ago. The portfolio returns of debt mutual funds will marginally increase following today's rate hike. Given that the market had already picked up on a 25 bps increase in the current rate, the move to the higher would be small and insignificant. The performance of debt funds will be impacted for a while since interest rates and bond prices move in opposite ways.


Bank floating-rate loans' interest rates will increase right away because they are compared to the EBLR, an external standard. With effect from May 4th, 2022, the RBI repo rate increased by 2.5%; the rates on the 3-month and 6-month Treasury bills also increased significantly. As a result, EBLR loan rates will rise. The accrual of other loans, known as MCLRs (Marginal Cost-Based Lending Rates), takes longer. On the other hand, the depositors stand to gain from this decision.