The Reserve Bank of India’s monetary policy committee decided to hike the repo rate by 0.25 per cent. This is the rate at which RBI lends money to banks. The mandate of the RBI committee is to look at the inflation outlook in the economy and set rates. Currently, rising oil prices and expectation of a higher government spending ahead of general elections in 2019 means the inflation in the economy is expected to hover above the 4 per cent level. In fact, the RBI policy statement puts the inflation outlook at 4.8 per cent for 2018-19. This means interest rates are unlikely to go down any time soon.
This action pretty much sets the borrowing rate for all of us. If you are looking at taking a personal loan or have a floating rate home loan or a personal loan, your interest burden is likely to go up. Banks usually pass on the increase to floating interest rate borrowers immediately.
Your current and new loans
You will receive a communication soon from your bank about the revised interest rate on your home loan. Banks reset the marginal cost of funds lending rate (MCLR) almost immediately after a rate change announcement from the RBI. This is the minimum rate at which the bank can lend money to any borrower. Loan rates are further decided based on the segment, borrower profile and the quantum of loan. A slew of banks already announced an immediate hike in this MCLR rate. So, if you are a borrower of loans from Kotak Bank, Karnataka Bank or Union Bank of India, your loans have become expensive by 0.05-0.15 per cent. Usually, it is observed that most banks are quick to pass on hikes in interest rates. It is a given that all new loans would be more expensive than earlier.
Your bank deposits
In a rising interest rate scenario, your fixed deposits in banks should earn more. According to an analysis by CARE Rating, a credit rating agency, from the date of announcement of the rate hike of 0.25 per cent in June 2018 till the August 2018 monetary policy meeting, the deposit rates have increased on an average by 0.13 per cent. However, any change in fixed deposit rates will be applicable on renewals only.
Your equity investments
If you have allocated a sizeable part of your monthly surplus to equities, you may see a flat to a negative trend in the short-term. When interest rates rise, borrowing costs for companies go up. In that situation, you may want to buy companies that have low debt. Most IT sector companies have witnessed a rally in the past few weeks. However, equity markets also function on the back of your ability to see the future trend.
The RBI policy committee statement also observes that the lead indicators for the economy are showing a positive trend after many quarters. As a result, the committee has retained the growth forecast at 7.4 per cent. While you may want to take it with a pinch of salt, the final growth number is unlikely to fall below 7 per cent, according to most pundits. This clearly means that companies riding on India’s economic growth for their business growth and profits would continue to benefit. In the stock market, there is a thumb rule. Companies that depend on the country’s economic growth usually grow profits at twice the rate of GDP growth. So, most of the companies in the automobile, financial services and consumer space would grow profits at 14 per cent and above.
You may want to speak to your financial advisor and understand the concept of valuation. In most cases, current share prices of companies may be already taking into account the potential profit growth. A good advisor will always help you identify those good companies that have yet to see a share price rally in anticipation of future profits. If that is not possible, it may be a good idea to hold cash and wait for a sharp fall in the market to seize the opportunity.
(The author is a publisher and founder at Simplus Information Services Pvt Ltd)