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The Reserve Bank of India unanimously decided to continue with a rate hike pause on Thursday. This is the third time the RBI MPC has decided to press the pause button on the repo rate hikes.
The repo rate stands at 6.5 per cent. Since 2022, the repo rate has been hiked by 250 basis points. The RBI had kept the rates unchanged in April and June meetings too.
Today’s decision to keep the repo and the reverse repo rates unchanged was aligned with the market expectations and signifies that India is close to the end of rate hikes cycle. The market has been pricing in rate cuts starting from February to April of 2024.
What should retail investors do?
Lock in your desired FDs
“For retail investors, this is a good time to lock in their desired fixed-income allocation in bank FDs. 10 year Gsec yields after having fallen to 7% in June have risen to 7.2% in August. Investing in long duration debt funds can also be a good strategy. As the interest yields start falling, the capital appreciation of long duration bonds can give good returns,” said Anshul Gupta, Co-Founder and Chief Investment Officer, Wint Wealth
Home loan borrowes should continue with floating interest rate loans
Borrowers also need to apply a cautious approach, prepay their high interest debts, borrow responsibly and pay their bills on time to incur any additional cost to their existing financial liabilities.
What about markets?
” Next few months would be a good opportunity to add duration to the portfolio with a 12 month investment horizon. It would be difficult for risky assets to perform in face of the headwinds caused by tight monetary and financial conditions,” said Sandeep Bagla, CEO , Trust Mutual Fund.
Risk of inflation is lurking around
The risk of inflation continues to lurk and if it rises further, there could be some repercussions on overall housing sales, especially in the cost-sensitive affordable housing segment which has already been severely impacted by the pandemic over the last couple of years.
“Amidst the rising cost of these properties and the cumulative 250 bps rate hikes by the RBI in the last one year and more, affordable housing buyers have taken the severest blow. As per ANAROCK Research, homebuyers’ EMIs jumped up by 20% in the last two years. Home loan borrowers who were paying an EMI of approx Rs 22,700 in July 2021 are now paying approx. INR 27,300 – an increase of approx. Rs 4,600 per month,” said Anuj Puri, Chairman – ANAROCK Group
This 20% increase in the EMI has resulted in a jump of approximately Rs 11 lakh in the overall interest component – from approx Rs 24.5 lakh interest payable in 2021 to Rs 35.5 lakh today. The total interest payable over a 20-year tenure is now more than the principal amount!
First Published: Aug 10 2023 | 10:36 AM IST
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