RBI hikes repo rate by 25 bps to 6.5%; here are 5 ways it will impact you as a retail investor

The repo rate hike was somewhat expected. The central bank had been mandated to keep the inflation rate at 4 percent. Today, we have a situation where the 4 percent mark has been exceeded for eight straight months.

In June, inflation was at 5 percent. Along with this, the rupee has weakened, crude prices remain volatile, and government expenditure is expected to rise with the upcoming Lok Sabha elections. The RBI continues to maintain a neutral stance on policy rates.

With an increase in policy rates, bank deposit rates are expected to rise as well. Just one day back, the SBI hiked its deposit rates by 5 to 10 BPS. This means marginally higher interest earnings for customers opening fixed deposits with banks.

Loans will get marginally costlier. In June, several leading banks including SBI had increased their MCLR. With the rate hike today, we’ll see loans get costlier. On a loan of Rs. 1 lakh for 20 years at an interest rate of 8.5 percent, the EMI is Rs. 868. If the rate rises to 8.75 percent, the EMI increases to 884. If the interest rate reaches 9 percent, the EMI becomes Rs 900.

In a rising rate scenario, it makes immense sense for customers repaying loans to make periodic principal pre-payments. This is especially helpful while you’re in the first half of your loan tenure. Pre-payments made in the first half have immense impact in reducing your long-term interest outgo and thus ensuring savings.

In recent years, we had seen heavy inflows into the equity markets corresponding with a steady drop in interest rates. The intrepid investor seeking higher returns chose equity in this period.

As a result, mutual fund AUMs grew at a tremendous pace. Now, with rising interest rates, fixed income instruments are becoming attractive again. The investor with a risk appetite can continue to invest in equity with the expectation of above-average returns in the long-term.

Rising rates are bad news for investors in debt mutual funds. This is because the prices of bonds fall, and bring down the NAV of bond funds. It would be advisable for investors to steer clear of long-term debt funds and go for funds with shorter maturity periods. Short-term debt funds are expected to deliver lower volatility and low risk in this scenario.

With two consecutive hikes in the repo rate, taking it to 6.50 percent, there is now heavy expectation of increase in small savings returns. For the April to June quarter, the rates remained unchanged. Investors looking for risk-free, guaranteed returns may continue to invest in PPF, NSC, Sukanya Samriddhi, Post Office Savings, etc.

Disclaimer: The author is the CEO at BankBazaar. The views and investment tips expressed by investment experts/broking houses/rating agencies on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.