Despite the rupee tottering at 74 levels versus dollar (it was in 73 zone before policy announcement) and crude oil rates going up amid US Federal Reserve tightening its own policy rate, the Reserve Bank of India on Friday shocked the markets by going for a status-quo. While the usual pro-growth commentators and policy analysts were quick to pounce upon the opportunity to herald RBI as a growth protector, the truth is stock markets were not impressed one bit judging by their reaction. The stock market, after going through gyrations, settled for the day with a 792-point loss for the Sensex. Thankfully, the dollar closed at 73.80 levels after going above 74 intra-day. Let us find out what the RBI status quo means for you.
In an unexpected move, the monetary policy committee (MPC) of Reserve Bank of India (RBI) maintained status quo on key rates, with repo rate unchanged at 6.5%. This pause comes after two consecutive rates hikes in June and August. The RBI’s policy mandate is to anchor inflation. Actual inflation at the end of Q2 were below projections at 3.7%.
Despite the increase in crude prices and tightening of global financial conditions, the inflation is projected at 3.9-4.5% for the rest of the year and fits within RBI’s target of 4% for consumer price index (CPI) inflation, which could be one of the reasons for holding the rates. The MPC has also changed the stance from ‘Neutral’ to ‘Calibrated Tightening’, indicating that future upward revisions may be possible.
Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund said that the RBI seems to be in a wait and watch policy as the CPI inflation target has been revised down by 20 basis points and growth is expected to slow down in the coming quarters. “RBI has taken this call as they expect growth decelerating forward due to global uncertainty led by trade wars and higher oil prices,” he argued.
From the bond market perspective the no-hike-policy is a surprise outcome; yields have dropped 10 bps post policy to 8.05%. The policy outcome will change the terminal rate assumptions by market participants as the message is inflation is the prime and only target. So, with big rate hikes out of the way for now, markets will try to position for further liquidity infusion by RBI through OMO purchases. However, bond markets will closely track currency market, as no change in rates today has upset the currency market, points out Kunal Shah, Fund Manager – Debt, Kotak Mahindra Life Insurance.
Loans and FDs
Bank FD rates could stabilise. Adhil Shetty, Co-founder and CEO, BankBazaar.com said: “A status quo in the policy rates means that deposit rates would stabilise or marginally increase. We have recently seen interest rates of small savings schemes for the current quarter go up by 30-40bps. This increase will contribute to driving up the interest rates on bank fixed deposits as well. So, if you are looking for assured returns and safety of capital, small savings are becoming more attractive.”
No rate hike means no higher EMIs, for now. Though RBI has maintained its stance, some major banks have revised their rates, and more may follow. In such a scenario, your best plan is to try and prepay your loans in part or full. Even a small change in interest rates can have significant impact on your loans, especially in case of long-term loans like home loans, and even a small prepayment can help in a big way, says Shetty.
For those investing in property, no rate hike is good news. But that is not the case. Anuj Puri, chairman, ANAROCK Property Consultants, says this status quo move could have been seen as favourable for the real estate sector in the short-term; however, banks have already started increasing their lending rates even before the monetary policy was announced. “It is, in fact, a worrisome development from a macro-economic long-term perspective. It will result in increased fiscal deficit, which does not bode well for any industry, including real estate, and also in further erosion of the rupee’s value,” says Puri.
This is a welcome news for the housing sector as status quo on rate hike will give the right boost to the sector which has started to do well as evident from solid numbers of new launches and absorption numbers in the last few quarters. “We expect with the festive season kicking in, there will be further growth in housing demand for projects by renowned developers,” said Prasoon Chauhan, CEO, HomeKraft, an ATS company, said.
Stocks and Rupee
While the RBI has clearly chosen to protect growth over inflation, stock markets reaction to the policy seems interesting. Usually, markets don’t like interest rate hikes. But this was one of those rare occasions when stock markets wanted RBI to hike rates to protect the rupee. It didn’t happen. So, markets sold off, with the Sensex down 792 points or 2.25% on Friday, after a similar fall on Thursday.
Soumen Chatterjee, director research, Guinness Securities, says the rupee hit all time low at 74 to USD as the policy decision works against ‘interest rate parity’. However, the RBI’s focus to support domestic growth amid challenging global economic conditions will gradually support rupee in near-term, he hoped.
Some experts forecast the rupee to strengthen. Gaurang Somaiya, currency analyst, MOFSL expects that the USDINR pair will now face resistance at 75.30 and on the downside support is at 73.40 -72.90.
The rupee fell to fresh record low levels after the RBI maintained a status quo approach. Expectation was that of a 25bps rate hike with domestic equities and the rupee witnessing a sharp sell-off post the announcement.