As the governor of the Reserve Bank of India (RBI) began to articulate the conclusion of the policy review meeting, participants’ attention was drawn to the possibility of an interest rate rise and the advice on rate measures. As we’ve mentioned in previous columns, it was supposed to be more of a rate ‘normalization’ than the conventional idea of rate rises.
However, this was not the case. The Reserve Bank of India (RBI) slashed interest rates to record-low levels in order to aid the economy in its battle against the pandemic-induced downturn. Now that the economy has recovered from its coma and is returning to normalcy, interest rates must also be ‘normalized.’
The markets were pleasantly surprised since not only were interest rates not raised, but the monetary policy committee (MPC) also maintained an accommodating posture, which suggests that the committee is tilted toward keeping interest rates on the low side.
Another ‘present’ was also given to the market on top of all of this. Every policy review meeting, the MPC releases predictions for inflation and GDP growth, which are then discussed further. The estimated CPI inflation rate for the next fiscal year, 2022-23, is 4.5 percent, which is much lower than the expectations of economists and experts.
Both the equities and debt markets have benefited as a result of this. It should bring relief to our readers as well, since reduced inflation means less strain on your wallet. However, given the high global costs of crude oil and other commodities, it is prudent to see this as a cautious estimate, since real inflation in 2022-23 may be no more than 4.5 percent.
Nonetheless, the fact that the RBI is providing a prognosis after doing thorough study indicates that inflation will be less severe than what we have been led to expect based on current commodity prices, which is a great development for all of us to consider.
After everything is said and done, where do we stand on the prospect of interest rate hikes? It is just a matter of time until it occurs. Apart from other factors such as GDP growth, the current account deficit, the value of the rupee, global interest rates, and so on, inflation is the most important factor for the Reserve Bank of India in determining interest rates.
Given that inflation is expected to be lower than previously anticipated, it may seem that rate rises have been postponed or may not occur to the amount that we anticipated before.
Having said that, interest rates are at an all-time low, and they will not be able to maintain their current levels indefinitely. Real interest rates, which are defined as the returns on fixed income investment products after deducting inflation, have been negative for a long period of time.
It is the central bank’s responsibility to balance the interests of savers/investors wanting high interest rates with the needs of borrowers seeking low interest rates, and vice versa. Despite the fact that the RBI cannot guarantee true positive rates, it must take steps to achieve a reasonable equilibrium.
When faced with an unusual event such as the pandemic, interest rates were slashed to extremely low levels, resulting in actual negative interest rates. Now is the time to shift our focus to something really uplifting. Because inflation is predicted to be lower than previously anticipated, rates will not need to be raised as much throughout the rectification process.
In terms of our position on the ground, where do we stand now? Borrowers, such as those who have taken out home equity or personal loans, will have more breathing room in the coming months since interest rates are not expected to rise as quickly as we had anticipated previous to this policy review.
As a result of the RBI’s subtle warnings earlier this year about the possibility of policy rate normalization, a few lenders have modestly raised deposit rates for investors in deposits such as bank term deposits. However, they are little efforts that will have no significant influence.
Because of the positive prognosis provided by this policy review, a rise in deposit rates has been postponed. People who rely on interest from bank savings will have a lengthier wait time as a result.
Because of the extremely high amount of government borrowing forecast for 2022-23, investors in debt mutual funds have seen yield levels on bonds in the secondary market rise in the wake of the Union budget.
Because yields and prices move in the opposite direction, this has had a negative influence on the returns from bond funds in the recent past. Following today’s reassuring policy review, yield levels have fallen, and the effect for debt funds has been overwhelmingly favorable.
Although large interest rate reductions have occurred in the past, the accrual level of debt mutual funds, the rate at which interest accrues to these funds is not favorable when compared to the current level of inflation. Going ahead, if and when interest rates rise possibly to a lower amount than we anticipated earlier the movement in that phase would be negative, but the accrual level would be much higher as a result of the higher accrual level.
The policy revision has been well received by the stock market, since low interest rates and a projected inflation rate that is far lower than the previous forecast are beneficial to businesses, consumers, and investors.
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