Explained: What RBI’s status quo means for stock investors and borrowers

Retail inflation for the next fiscal (FY23) is projected at 4.5% — lower than earlier projections. The panel said inflation was likely to moderate in the first half of 2022-23 and move closer to the target rate thereafter, providing room to remain accommodative.

The big FY23 market borrowings too may have nudged RBI to delay liquidity normalisation — a bid to keep the cost of borrowing under control, an analyst said.

What does status quo mean for the economy?

There were concerns in the market that rising inflation may push the RBI to turn hawkish and even take steps to withdraw liquidity from the economy. Leaving the Repo rate — at which RBI lends to commercial banks — and the reverse repo rate — at which RBI borrows from commercial banks, unchanged indicates low interest rates will continue for the time being.

The policy statement came as a surprise, and brought relief to the markets. While the policy is in line with the government’s push for capital investment this year, it may also support borrowing by corporates — in that sense, continuing low interest rates augurs well for both consumption demand and investment in the economy.

“Contrary to market expectations, RBI maintained its rate status quo and accommodative policy stance. This will accelerate the growth momentum in the economy,” Rajiv Sabharwal, MD & CEO, Tata Capital Ltd, said.

Economists said a key reason RBI has kept the policy interest rate at historic lows for longer is to spur a more durable rebound in private consumption.

“There is a view that as a strong rabi crop boosts food supply in April-June and supply disruptions arising out of the third wave of the pandemic recede, CPI inflation will moderate, allowing policy rates to remain low for longer than in the developed world. That will provide a boost to equity valuations, and help spur a broad-based recovery in consumption and investment,” Prasenjit K Basu, Chief Economist, ICICI Securities, said.

And what does it mean for borrowers and savers?

Borrowers, especially home buyers, will benefit as lending rates are unlikely to go up in the near future. “One of the important factors driving home-buying is record low mortgage rates. With the policy rate unchanged, lending agencies will continue to maintain the prevailing low home loan interest rate,” said Samantak Das, Chief Economist and Head of Research & REIS at JLL India.

The total home loan outstanding was Rs 14.90 lakh crore as of November 2021, and the personal loan outstanding was Rs 29.85 lakh crore. As the RBI reduced the repo rate to 4.0% in February 2020 and reverse repo rate to 3.35%, banks reduced their interest rates (both deposits and lending) significantly.

Savers and depositors, on the other hand, will find their interest income unchanged. After taking into account the 5.59% inflation in December, depositors are making a nominal loss on one-year term deposits. The State Bank of India offers 5.10% interest on one-year fixed deposits.

What about debt and equity investors?

Although RBI has not followed global central banks in tightening interest rates, the market anticipates an increase in rates later this calendar year. Experts feel debt investors should ideally keep their funds liquid, and deploy them over the next one year alongside the hike in interest rates.

“Investors looking to allocate to debt strategies are advised to look at fund segments with lower duration profiles and use target maturity strategies to gradually lock in incrementally higher rates over the next 6-12 months,” Axis MF said in a note.

Fund managers also believe bond yields may remain volatile, and investors should be vigilant. “Continued volatility in market rates remains the base case as there seems no clear fundamental reason to validate lower rates, except continuing dovishness and lack of pre-emptive policy normalisation actions by the central bank,’ said Rajeev Radhakrishnan, CIO-Fixed Income, SBI Mutual Fund.

As for equity investors, the continuing low interest rate and accommodative stance of the monetary policy means further rise in equity valuations for now. RBI’s focus on growth will likely push up equity markets further.

Challenges will, however, come from global interest rate increases, and the outflow of funds from Indian equities.

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