RBI’s Repo Rate Hike: How It Will Affect You?

4th Oct 2022

Amid soaring crude prices, rising inflation, and fears of an impending global recession, central banks across the world have raised their repo rates recently. Maintaining its hawkish stance and in line with the move adopted by central banks globally, RBI, too, has announced a hike in repo rates by 50 bps on 30th September 2022. With this increase, the repo rate now stands at 5.9%. For the unversed, the repo rate refers to the rate at central bank lends short-term funds to banks.

Higher interest rates help to restrict the money supply in the country and reduce inflationary pressure, thereby encouraging people to spend less and save more.

Impact of RBI’s repo rate hike on the stock market

Generally, when repo rates increase, investors tend to shift their funds from equity to fixed-income assets like fixed deposits. However, what we witnessed in Indian markets was just the opposite. Markets cheered the rate hike proposed by RBI, with the benchmark indices Sensex and Nifty gaining 1000 points and 275 points, respectively on 30th September 2022.

Here are the top reasons why markets rallied despite a hike in repo rate:

Interest rates for fixed deposit and small savings to go up

When the repo rate increases, interest rates on bank fixed deposits will also increase, making them an attractive proposition for investors with a low-risk appetite. The government has already raised the interest rates on select small savings schemes earlier this week by up to 30 basis points.

  • Investors had already anticipated RBI’s rate hike, which was in line with the expectations and could be drawing ease from the fact that this may be the last rate hike cycle in India.
  • A minor revision in the FY23 GDP growth target from 7.2% to 7% indicates RBI’s confidence in the Indian economy’s growth momentum.
  • India recently became the 5th largest economy and continues to outperform several other economies.

Loan EMI’s to become costlier

With this repo rate hike, home loans will become costlier, impacting the sale in mid-range and affordable housing segments. While new borrowers will have avail home/auto/personal loans at a higher price than earlier, existing borrowers who have taken loans on floating rates will also be affected.

Closing thoughts

While increasing repo rates will bring cheer to investors in small saving schemes, it will make all types of loans dearer for borrowers. Equity investors too have nothing to worry as many fundamentally sound stocks are available at reasonable valuations due to recent market corrections. With lot of uncertainty still looming large globally due to geopolitical tensions, global food and supply chain disruptions, RBI has taken the right steps to tame the double-edged sword called inflation.

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