Experts and economists explain in detail the rate-hike and it's impact on various investments

Last Updated: Sat, Aug 04, 2018 15:13 hrs
RBI Governor Urjit Patel speaks during a news conference after the bimonthly monetary policy review in Mumbai

The Reserve Bank of India's monetary policy committee announced the revised repo rates.

Citing inflationary concerns, the MPC raised repo rates by 0.25% to 6.50%.

Reverse repo rate has also been hiked by 25 basis points to 6.25%.

The regulator has retained a "neutral" stance.

The announcement on Wednesday saw five of the six members on panel bat for a rate hike.

Dr. Chetan Ghate, Dr. Pami Dua, Dr. Michael Debabrata Patra, Dr. Viral V. Acharya and Dr. Urjit R. Patel voted in favour of the decision; Dr. Ravindra H. Dholakia voted against the decision. Full announcement here.

What are economists and bankers saying:

Shashank Mendiratta, an economist with ANZ Bank explained in a note, "The tone of policy seems slightly on the hawkish side despite RBI tinkering only marginally with its second-half inflation projection. The RBI continues to reiterate long-standing risks to inflation and in particular oil prices remain a key risk.

He believes that there could be one in October, but concedes that the rupee may remain under pressure due to worsening domestic fundamentals and capital outflows.

Abheek Barua, HDFC Bank's Sr. economist, noted for his critical views explained that the rate-hike was a "textbook method of defending a currency."

He too concurred that a rate hike in October was on the cards.

Anagha Deodhar an Economist with ICICI securities expressed surprise that the regulator remained "neutral". "We were expecting that since this is the second consecutive hike in two policies, the stance would be changed to 'tightening'."

She too concurred another rate hike. On the currency front, Deodhar added, "I don't think rupee will be a key factor in the Reserve Bank of India's rate decision because they have repeatedly said they do not target any specific value of rupee - they just want to curb volatility."

Moses Harding John, the CEO for State Bank of Mauritius Holdings shared a note as well as a tweet. He explains that MPC preference was to have better grip on "sticky inflation and to arrest weakness beyond 69."

"The way forward comfort for the stakeholders is from optimism on GDP growth, pegging it around 7.5% and not lifting the CPI risk beyond 5% despite impact from MSP & other domestic factors in play, while deriving output comfort from good monsoon across India," John added.

Dhananjay Sinha, Economist with Emkay Global Financial Services concurred the rate-hike on several factors- currency, inflation...

He said, "Inflation momentum will continue to be on the rising side and will get broad based going forward. Key factors driving are core inflation that has been consistently trending up, government spending has been exhibiting reflationary bias."

"This will boost near term consumption demand while also stoking inflation. Currency depreciation will have a lagged inflationary impact, thereby accentuating the impact of rising global commodity prices. Increase in MSPs and aggressive food-grain procurement has a significant impact of retail inflation. We believe that 15% average hike in MSPs (minimum support price) for kharif crop announced recently will prop up good inflation and general retail inflation. We see trade protectionism also having an inflationary impact," added Sinha.

Sujan Hajra, Chief Economist at Anand Rathi Financial Services, however suggests that the RBI could pause the policy meet. In a note, he explained, "With 50 bps rate hike in quick succession, we expect the RBI to remain in the pause mode for at least couple of policy meets barring greater than expected flaring of retail inflation.”

How do Fund Managers view the rate hike:

While a rate hike was most probable on cards, with most polls favoring a rate-hike, fund managers majorly looked at a slipping of 10 year bonds.

Adhil Shetty, CEO at BankBazaar explains in a note, "the yield on the 10 year bond slipped to 7.74% (On Wednesday). It takes away the sword of another hike now."

"Rising rates are bad news for investors in debt mutual funds. This is because the prices of bonds fall, and bring down the NAV of bond funds. It would be advisable for investors to steer clear of long-term debt funds and go for funds with shorter maturity periods. Short-term debt funds are expected to deliver lower volatility and low risk in this scenario," he adds.

Shailendra Kumar, CIO at Narnolia Financial Advisors opined that equity markets were already trading at a higher valuation and continued rally hinged on strong corporate numbers and strong macro.

"NPA distress is already hurting broader economic growth. Most of the recent loan growth is from retail books. On the corporate side, credit is becoming difficult beyond top-rated corporate. Many infra players are finding difficulty in the financial closure of recently won HAM orders from NHAI. Banks and finance companies are facing challenges due to rising rates as pressure is being seen on both NIM and other income. Just like the RBI policy statement, we need to keep a data-driven approach as the current policy does not eliminate any of the near-term worries..." he added.

Lakshmi Iyer, CIO (DEBT) at Kotak Mutual Fund, said, "policy stance remains neutral despite the rate hike. We maintain this... is a shallow rate hike regime and no great reason at this juncture for back-to-back rate hikes.

"The rupee would be vulnerable to developments on the global trade war front. Emerging market currencies are in general trending on the softer side, and hence, India may not be an exception. Hike in rates should provide near term support to INR given the massive depreciation year-to-date in 2018.

Kunal Shah, Sr. VP at Kotak Mahindra Life Insurance believes that the tone was broadly neutral. "I think what they have delivered is somewhat concluding the expected increase in inflation rather than the realised inflation because realised inflation has been running lower than forecast. So, maybe some expectation of MSP (minimum support price)-related increase in inflation, and they want to pre-emptively be cautious and deliver a rate hike, and that is what I think the market is expecting," he said.

"Inflation continues to remain under control. Even today, the Reserve Bank of India has not revised its inflation forecast... I think even the RBI is comfortable with the projected inflation, but they are not comfortable with the unexpected rise in inflation... so they just gave a pre-emptive hike, otherwise they could have increased their inflation projections, which they have not done," he added.

Consumer Front: Real Estate:

Shishir Baijal, Chairman & Managing Director, at Knight Frank India, a real estate consultancy expected a pause. He said, "The 25 bps increase in the policy rate was on expected lines given the current inflationary trend. However, looking at the challenging residential market scenario, we were hoping that the RBI would have paused the rate hike thereby providing a fillip to the buyer sentiment."

Anuj Puri of Anarock shares a detailed explanation. The Chairman at Anarock Property Consultants explains, "While this may lead to a hike in home loan rates as well, the overall real estate sector now rests on a strong footing and buying decisions may not be altered by these marginal changes."

"As per ANAROCK research, nearly 60,800 units were sold in Q2 2018 across the top 7 cities of India, which is a 24% rise over the previous quarter. Amidst a 50% quarterly rise in new launches in Q2 2018 too, unsold inventory reduced by 2% from 7.11 lakh units in Q1 2018 to 7.0 lakh units in Q2 2018."

"These numbers clearly indicate that the markets are now recovering from the shocks of structural changes and policy reforms. In fact, genuine home buyers have welcomed these actions which have imbibed the much needed financial discipline, accountability and transparency in the sector."

"With lucrative deals on the table, serious end-user demand is back on the market and marginal hikes in home loan rates are unlikely to deter buyers who have been sitting on the fence for some time now, waiting for the right time to seal the deal."

Sankar Subrahmaniyam, COO at Karle Infra, an infrastructure developer from Bengaluru explained with an example to suggest that the repo-rate hike would lead "customers to pay one or two additional installments for a loan tenure of 15-20 years."

He said, "The hike was unavoidable owing to economic circumstances. The cost of capital for retail buyers could go up marginally. But, the overall impact on the end customer, in the long run, may not be as we don't foresee buying decisions being impacted majorly."

"The repo rate should stabilize in future and in the long run this impact would be neutralized. Once the lending rates are normalized, the cost-sensitive sectors such as real estate will see a steady growth," he added.

Raja Mukherjee the Chief Marketing Officer at Sowparnika Projects, a realtor from Bengaluru explained that customers mostly calculate monthly EMI pay-outs and not the repo-rates. "Most of our projects are smaller in size but come with hi-quality construction material, fixtures and have effective carpet areas. These projects are well-connected and the pricing is 20% lower than that of our competitors. A repo-rate hike of 0.25% in such projects does not seem disruptive."

When asked whether EMIs for PMAY and affordable housing segments could change, Mukherjee explained, "The impact to PMAY customers is negligible to say. We have customers in our PMAY scheme. In cases where we offer Pre- EMI scheme, our customers will not find a major impact because their EMI payouts will start only after possession."

Mukherjee is of the firm opinion that the sector runs high on sentiments. "They were low when GST and RERA were implemented, but now people were confident of buying a house and hence a repo-rate hike will be the last thing on their minds," he added.

Of Investments, Deposits, and EMIs

Adhil Shetty suggests in a note that a rate-hike would be beneficial to deposit holders, although, the impact was negative for those with loans.

"Loans will get marginally costlier. In June, several leading banks including SBI had increased their MCLR. With the rate hike today, we’ll see loans get costlier. On a loan of Rs. 1 lakh for 20 years at an interest rate of 8.5%, the EMI is Rs. 868. If the rate rises to 8.75%, the EMI increases to 884. If the interest rate reaches 9%, the EMI becomes Rs. 900. In a rising rate scenario, it makes immense sense for customers repaying loans to make periodic principal pre-payments. This is especially helpful while you’re in the first half of your loan tenure. Pre-payments made in the first half have immense impact in reducing your long-term interest outgo and thus ensuring savings."

Speaking of investments, he said, with two consecutive hikes in the repo rate, the interest has gone to 6.50%. "There is now heavy expectation of increase in small savings returns. For the April to June quarter, the rates remained unchanged. Investors looking for risk-free, guaranteed returns may continue to invest in PPF, NSC, Sukanya Samriddhi, Post Office Savings etc. with the expectation of marginally higher returns in the coming days," he said.

Gold Investments?

Returns on Gold investments have been in the range of 3-4% per annum. Bank deposits, PPF, NSC, and Post office savings offer better interest earnings and offer better tax benefits. Gold and bullion investments are likely to lose sheen. Also, a higher greenback makes Gold costlier in INR terms.

An announcement from the Federal Reserve on the economy is expected on Wednesday. So far trade related concerns between US-China have been a major factor that have buoyed Gold prices. Higher dollar tends to mount pressures on international spot prices of Gold.

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