RBI’s MPC Still Hawkish on Rate Hikes?

RBI’s MPC February 2023 analysis

The RBI’s MPC has hiked the repo rate by another 25 bps. Let’s explore what it means for individuals.

What’s Happening?

In 2022, all the global players struggled to tame inflation, and so was India. But, by the end of 2022, the Federal Reserve Chairman, Mr Jerome Powell, indicated a shift in the stance of an aggressive rate hike cycle. Accordingly, the RBI followed similar steps and slowed the rate hike cycle; hence we saw a 35 basis point hike in December 2022. 

The MPC meeting held on 8th February 2023 was the first MPC meeting of the new year. The meeting outcome was no surprise, as everyone had predicted that we would see a 25 bps repo rate hike, and that’s what happened. 

Before we look at the nitty-gritty details of the MPC meeting, just to let you know that we have come a long way in easing inflation. Customer inflation has come down to 5.72% in December 2022, which was 7.79% in April 2022. But, the RBI refers to core inflation and not customer inflation which was above 6% as of December 2022. Yes, the situation has improved from what we had started with. 

But, still, the MPC hasn’t signalled a pause in upcoming rate hikes because inflation is still above RBI’s target. 

Critical Takeaways From February 2023’s MPC Press Release

In the MPC press release, Mr Shaktikanta Das mentioned that inflation has shown signs of moderation and the worst is behind us. But the concerns around core inflation still exist, so we cannot take our eyes off inflation. 

  • RBI hiked the repo rate by 25 basis points to 6.50%.
  • The Marginal Standing Facility rate will stand revised at 6.75%.
  • GDP growth is seen at 6.4% in FY24.
  • CPI inflation is seen at 5.3% in FY24.
  • The timing of the bond market is restored to pre-pandemic hours (9 am to 5 pm).
  • Soon, the RBI will issue draft guidelines on penal charges to ensure transparency and uniformity.
  • G20 inbound travellers can now use UPI for merchant payments in India.
  • RBI will launch coin vending machines in the pilot phase based on QR codes.
  • The RBI will soon issue guidelines for the framework of green deposits.

How Will The Rate Hike Affect You?

  • If you have allocated a part of your portfolio towards debt funds, the rate hike is good news for you as interest rates and bond prices move inversely. But, the effect on bond prices would be marginal as the markets have already factored in the rate hike.
  • Companies will face a tough time as the cost of borrowing will go up, and FDs have become even more lucrative as they will offer higher interest rates. 
  • As there is no indication of when the interest rate cycle will peak, individuals who have opted for a home loan are likely to feel the pinch. According to a report by Andromeda mentioned in Moneycontrol, if someone had taken a 20-year home loan of Rs 70 lakh at 7% in May 2022, he/she will have to pay Rs 10,978 extra every month as the interest rates have climbed up to 9.5%. That’s an increase of 20% in EMI, assuming the tenure remains the same. 

That’s it for today.

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