- Wealth PMS (50L+)
As widely expected, the Reserve Bank of India has raised rates by 0.25% – of both the Repo and Reverse Repo, to 5% and 3.5% respectively.
Note however that there has been almost no demand for repo in the last year – in fact, just today there was one request for 400 cr. which must have made the day for the guy who records repo transactions because he’s been on a chai break for an entire year and he’s sick of chai by now.
Reverse repo, which is where banks park money with the RBI, was seeing volumes of 80,000 cr. + daily; today, we’ve seen just 5,430 cr. This entire week, volumes were thin – have banks started deploying that cash appropriately? Huge signs for growth, but horrendous for an already out of control inflation number.
RBI doesn’t change it’s stance just one time – typical rate raising cycles last a couple years. Expect rates to go up. This time there are a number of reasons for sustained increase:
Okay – market impact. Banks will instantly raise their lending rates and PLRs and all that jazz, so expect a higher mortgage bill or EMI. For those locked into “teaser” rates, read your documentation carefully – I’ve seen some recently that allow banks to raise rates midway if it affects, among other things, their golf swing. What happens now is that banks offering teaser loans will have to deal with a smaller (but still pretty darn wide) spread between what they can borrow and what they’ve lent.
Real estate is going to have a tough time; sales aren’t happening, and if banks raise rates, hopes turn into prayers. No wonder nearly all RE stocks fell today.
Interest rate sensitives like Auto and the hugely-in-debt power sector will likely see some damage too, but only after more rate hikes.
What is good for savers is that deposit rates will increase.