What RBI MPC’s rate hike pause means for EMIs and investors

RBI Governor Shaktikanta Das said “headline inflation still remains above the target and being within the tolerance band is not enough. Our goal is to achieve the target of 4.0 per cent going forward”. This signals that RBI is uncomfortable with the 5 per cent-plus inflation in FY24. Also, it expects inflation to peak in Q3 of FY24, thus making the possibility of a rate cut in Q3 highly unlikely. Analysts expect a cut in Q4 (Jan-Mar).

The RBI also left the policy stance unchanged in a 5-1 vote in the MPC, seeing that liquidity remains in surplus and the withdrawal of Rs 2000 notes will add to it. Thus, the RBI is focused on “withdrawal of accommodation”.

There are some upside risks to the RBI’s inflation outlook. The performance of the monsoon will be critical for the trajectory of food inflation. International commodity prices (sugar, rice, crude oil) and domestic prices of milk also pose a threat to headline CPI. The expected pick-up in investment activity might create demand-side pressure on prices.

What will be the impact on EMIs?

As the repo rate remains at 6.5%, external benchmark lending rates (EBLR) linked to the repo rate will not increase. For borrowers with existing home loans, the pause in rate hikes means equated monthly instalments (EMIs) are likely to remain stable in the short term. “Banks may not immediately raise the lending rates for their existing home loan customers,” Kaushik Mehta, Founder & CEO of RUloans Distribution Pvt. Ltd, said.

EBLRs — 81% of which are linked to the benchmark repo rate — now dominate the mix of outstanding floating rate loans, with their share rising to 48.3% by December 2022, while the share of those based on marginal cost of fund-based lending rate (MCLR) eased to 46%.

Interest rates on home loans from most banks will likely continue in single digits — top banks currently levy between 8.7% and 9.65%.

Sanjay Sinha, Independent Director, Beacon Trusteeship Ltd, said the pause in the rate hike is a positive development for the real estate sector, and will help maintain the sales momentum witnessed during the last 2-3 months.

With rate hikes paused, banks will not increase fixed deposit rates. The decision will be driven by surplus liquidity in the banking system due to improvement in low-cost current account and savings account (CASA) balance following the deposit of Rs 2000 banknotes.

What’s there for the markets?

Although the interest rate decision represents a pause and a withdrawal of accommodation, the Governor’s comment can be interpreted as positive. The central bank’s projection for retail inflation in FY24 is 5.1%, lower than the 5.2% forecast at the last meeting, which suggests the MPC has reached the end of the rate hike cycle. If the monsoon is normal and the global scenario favourable, the MPC could consider a rate cut by the end of calendar year 2023 or early 2024.

From the perspective of equity markets, this comes as a big positive. The Governor’s comment that “India’s economic and financial sectors remain resilient amid global turmoil” reflects India’s strong and improving fundamentals. It will spur corporates to proceed with investments, infuse credit growth, and push consumption, which will help economic growth.

However, a sharp correction in the last hour’s trade on Thursday pulled the Sensex below 63,000 to 62,848.64 as realty shares faltered. While the rate hike pause was expected, subdued commentary by the RBI on inflation for this fiscal year dampened sentiment. The market had expectations of a more optimistic revision in the inflation outlook, taking into account the recent easing of inflation data.

What should investors do now?

The decision to continue with the pause on rate hikes is expected to be positive for the economy and markets, particularly for rate-sensitive sectors like banking and finance, auto, consumer durables, real estate, and infrastructure.

Investors should stay invested in stocks and equity funds and go for selective stock and sector-specific buying. Giving support to the market, foreign investors have also stepped up their investments with inflows of over Rs 59,000 crore since May 1, 2023.

The bond market volatility is now likely to be in a manageable zone. This has already been in play for the past few months; significant movements in US treasury yields did not influence Indian yields to the extent they used to last year. “It is likely that the probability of earning carry from bonds is now much stronger than what was the case last year,” Suyash Choudhary, Head – Fixed Income, Bandhan AMC, said.

Will there be a rate cut soon?

Given that liquidity conditions are likely to remain healthy over the next few months, inflation will likely be above the 4% target; the risks flagged are for the second half of the year. This suggests that the bar for a change in the accommodative stance is somewhat high for the next policy. “And if that is true then it is hard to expect a rate cut in the very next policy after that. Thus, the first ‘window’ for a rate cut now looks to be in December,” Choudhary said.