RBI Monetary Policy: Finally Some Cheer For FD Investors, As Rates Could Rise

The Reserve Bank of India today hiked repo rates by 50 basis points as was largely anticipated. The country's central bank also pegged the Real GDP For FY 2022-23 At 7%. It's almost certain, given the liquidity conditions in the economy and the size of the rate hike, interest on loans would rise and so would interest rates on fixed deposits. "Banking system liquidity has shrunk to near zero from more than Rs 8trn at the beginning of FY23, led by higher currency in circulation, government surplus (currently estimated above Rs3.5trn by September-end), and FX intervention. This has led to a spike in short-term money market rates, now tracking tad higher than repo rate. The tightening in domestic financial conditions combined with external benchmarking system has facilitated faster transmission of rate hikes and will ensure the expected 50bps hike gets well transmitted and reduces the need for aggressive hikes ahead," says Emkay Global in a report.

Today's decision should cheer the spirit of fixed deposit holders, who largely depend on interest income for their sustenance. Bank deposits are most certainly likely to rise by 15 to 50 basis points, given liquidity conditions today. On Thursday, the Government hiked the interest rate of small savings schemes.

On the other hand loans are likely to get costlier, including all forms of loans like home loans, auto loans, gold loans etc. The trend of higher interest rates is likely to stay for the next couple of years at least. For long, post covid we have seen interest rates subdued, but, this year, we have seem a fast rate hike of almost 190 basis points by the RBI. Analysts believe there could be another 25 basis points hike by the RBI and than a pause to look at incoming data before any action. However, by and large the rate tightening cycle by the RBI maybe over, unlike the US Fed, which may have some way to go.