RBI Policy: How Repo Rate At 6.5% Will Impact Common Man?

A stable economy not only improves the common man's investments, budgets, and savings, but also lifts overall cost of living. However, movement in inflation indicators always has a seasaw effect on day-to-day living. Inflation is a crucial economic factor and plays a huge role in our purchasing power and broadly what you save and spend. It is RBI's task to ensure India's consumer price index (CPI) stays under control. Being an inflation trajectory central bank, RBI has made yet another hawkish pause and kept policy rates unchanged for the fifth time in a row on Friday. And this will have a huge impact on common citizens.

Last year, multi-year high inflation was the biggest elephant in the room that impacted the global economy and India too felt substantial heat of it. However, the year 2023 has shown resilience growth by the Indian economy and RBI's pause after nearly a year of aggressive rate hike cycle has managed to tame inflation to a bearable spot.

On December 8th, RBI kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.5%. Also, the standing deposit facility (SDF) rate remains unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%. Further, MPC members led by RBI governor Shaktikanta Das continued to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

RBI's governor Das said "Monetary policy must continue to be actively disinflationary to ensure fuller transmission and anchoring of inflation expectations. The rate action so far is still working its way into the economy."

However, Das believes that the near-term outlook is masked by risks to food inflation which might lead to an inflation uptick in November and December. This needs to be watched for second-round effects, if any.

That is why, RBI retained its inflation target at 5.4% for FY24. But the latest CPI inflation print is at 4.87% in October 2023, which also marks the second month where inflation is below RBI's tolerance limit. Nevertheless, CPI is above RBI's medium-term objective target of 4%. Hence, RBI continues to be alert.

Das said, "RBI remain highly alert and prepared to undertake appropriate policy actions, as warranted. Monetary policy must continue to be actively disinflationary to ensure fuller transmission and anchoring of inflation expectations."

Aalesh Avlani, Founder and Director, of Credit Wise Capital said, "The unchanged repo rate is a positive step for India's credit economy, particularly for customers in rural areas who can now borrow more freely. This was witnessed during the recent festive season, where vehicle sales reached record highs, largely due to steady interest rates and lenders passing on the benefits to customers."

Typically, if the rate hike cycle is over, and RBI has ample time to keep rates unchanged due to a boom in GDP growth, common citizens are likely to benefit from this outcome.

Repo rate plays an important role in your savings such as fixed deposits, savings and recurring deposits among others. Your loan EMIs are also equally impacted by any change in the repo rate. Apart from this, a stable repo rate along with a better-than-expected inflation rate and economic growth raises your cost of living.

Furthermore, in the latest policy, RBI has decided that there was no need for OMO sales which comes as a big relief for bonds market traders. Also, stable conditions come as optimistic sentiment for traders in the stock market as rate-sensitive sectors like banking, healthcare, automobile, consumer durables, FMCG and real estate sector will see business growth. Additionally, RBI has enhanced the UPI transaction limit which is another booster for common citizens' digital transactions.

Loans EMIs:

With effect from October 2019, banks have stopped using MCLR as the benchmark for deciding term loan rates, and instead have linked their lending rates to external benchmarks such as RBI's policy repo rate. Hence, any change in repo rate will have a direct impact on EMIs of home loans, auto loans, and personal loans. If the repo rate is high, your EMIs tend to get costlier, but if the repo rate is lower your EMIs tend to fall as well and banks will be in favourable condition to trim down their lending rates.

A pause in repo rate also keeps EMIs steady which is a good sign.

Deposits:

As per Bajaj Finserv blog, the frequency at which FD rates increase or decrease depends on the repo rate by the RBI. The repo rate, in turn, is affected by the economic situation. Simply put, the FD rates usually see a change whenever there is a change in the repo rate.

A hike on repo rate comes as a positive for depositors as their rate of return on FDs will also rise. But a rate cut will have the opposite impact, and a steady repo rate like the current one keeps FD rates muted.

But since RBI has already increased the repo rate by 250 bps in FY23, both lending and deposit rates have increased significantly.

As per Surendra Hiranandani, Chairman and Managing Director, House of Hiranandani, The committee's decision aligns with broader economic goals, as a stable repo rate not only supports the real estate sector but also promotes overall economic stability. The equilibrium in lending rates encourages financial institutions to extend credit more readily, facilitating increased accessibility for potential homebuyers.

In addition, Hiranandani said, "The positive sentiment generated by the maintained repo rate is likely to attract foreign and domestic investments in the real estate market. Investors tend to favour markets with consistent and predictable monetary policies, and the committee's prudent move enhances the attractiveness of the Indian real estate landscape."

Stock Market Perspective:

Garg explained that the stock market is likely to react positively to the RBI's recent announcements. The decision to maintain the policy repo rate and the continued focus on inflation targeting provide a stable environment for investors. This stability, combined with India's strong economic fundamentals and GDP growth, is likely to boost investor confidence.

He further said, "The banking sector may benefit from the steady interest rate environment, as it aids in better margin management. Furthermore, sectors like healthcare and education might receive a positive impact from the enhanced UPI transaction limits, enabling more significant financial transactions in these areas. However, the emphasis on inflation control and potential supply-side shocks could mean cautious investment in sectors heavily reliant on raw material prices. Overall, the stock market is likely to experience a steady momentum, buoyed by a stable policy environment and strong economic indicators.

Bond Market:

Anitha Rangan, Economist, Equirus said, "Along with expectations of strong growth, RBI has not revised its inflation estimate downward. This means that RBI is comfortable that at the current policy rate, growth is not inflationary but rather real-demand-led growth. Furthermore, on the stance of liquidity, the governor said that there was no need for "OMO sales" with liquidity remaining tight. This is a big relief to the bond markets, which were edgy on OMO sales expectations. While sounding a point of caution on food inflation getting entrenched and being watchful of the 2nd round effects, the governor also noted comfort on moderation in core and other components in headline inflation. In summary, while reiterating their stance of remaining vigilant and watchful, there was a tone of comfort with most global central banks remaining on pause. A pro-growth policy without too much worry on inflation."

Also, Mukesh kochar National Head of wealth at AUM Capital said, in line with market expectations, although the near-term concerns over food inflation have not gone away. In terms of inflation, crude is providing a little comfort for the Reserve Bank. Core inflation remains stuck, but it is at a comfortable level. There is also a cooling off of inflation around the world. We're convinced the rates are picking up and should continue to be heard for some time. The US Federal Reserve is expected to cut its interest rate around the middle of next year, and flows in JP Morgan's bond index funds are scheduled to start before that. The yield on GSec should decrease by about 50-75 basis points as a result of both factors. We remain positive on long-term debt funds from 1-2 year perspective.

UPI Transactions Limit Increased:

Mahesh Shukla CEO & CO-Founder,PayMe highlighted that the RBI's move to raise the ceiling for recurring transactions via e-mandate from Rs 15,000 to Rs 1 lakh mutual fund payouts, insurance premium payments, and credit card payments is a major relief for investors. Also, the new UPI transaction limit rules allow individuals to make payments up to Rs 5 lakh for specific categories like hospitals and educational institutes, up from Rs 1 lakh - which can be viewed as a significant benefit for people seeking loans in emergency and for a cause. This will enable consumers to make higher UPI payments for education and healthcare purposes.

Furthermore, Shukla said, "the proposed increase in the limit for e-Mandates for recurring payments of mutual fund subscriptions, insurance premium subscriptions, and credit card repayments aims to boost their usage. Overall, the decisions taken by the central bank will be a major relief for the common man and investors from across the country."

Cost Of Living:

As per Paytm blog, the repo rate plays a crucial role in controlling inflation in the economy. When the repo rate is increased to curb inflation, it can lead to a decrease in consumer spending and demand for goods and services. This can indirectly impact the cost of living for a common man as prices of goods and services may stabilize or decrease due to reduced demand.

Lincoln Bennet Rodrigues, Chairman & Founder, The Bennet and Bernard Company said, "The status quo is maintained as the RBI is looking at containing inflation and managing liquidity. Moreover, we believe that the economy has now matured enough not to get impacted by a marginal change in interest rate scenario."

Rodrigues further added, "Buyers in luxury segment often have stronger financial stability and prioritise factors such as location, exclusivity, and lifestyle amenities over cost of borrowing. The significant insight from the decision to keep interest rates steady is the continuation of a positive sentiment, especially in the luxury segment. This is attributed to an extraordinary surge in demand for upscale properties from Non-Resident Indians (NRIs), High Net Worth Individuals (HNIs), millennials, and the middle-class, who have redefined their expectations of upscale living. However, a reduction in key rates would have been beneficial, ensuring increased market liquidity and facilitating those on the fence to confidently decide on luxury property purchases. Overall, the real estate landscape remains robust, and we anticipate a dynamic and flourishing year ahead."

Lastly, rate cut is expected to take from Q2 or second half of FY25. RBU's next meeting is scheduled to be announced from February 6th to 8th.