How Investors and Borrowers Affect When RBI Hikes Interest Rate?

RBI interest rates drive economic changes, and rate hikes have been introduced recently. Have a look at how the increase in rates will affect investors and borrowers.

Repo rates decided by the Reserve Bank of India constitute a significant factor in how the country's economy moves. There has been much negative news throughout the world in recent times like war, inflation, corona cases, etc. Now RBI has come up with mild news that might be negative for some and positive for a lot of people.

In a recent meeting led by the RBI governor, the country's central bank has decided to revise the repo rates and increase them. With the new increase, RBI interest rates sit at 4.90% with an increase of 50 basis points from the recent 4.40% mark, and this new rate will be brought into effect immediately while the current RBI rates make way for these updates.

The repo and reverse repo rates, in general, have a big impact on how the economy, banking, and finances function. As the rates increase, they'll trigger many changes in the system, and as an investor or borrower, you'll undoubtedly get affected somehow.

Let's first understand what are repo rates and reverse repo rates and what they are used for.

What Are Repo Rates And Reverse Repo Rates?

When commercial banks have excess cash, they can deposit the excess cash with the RBI, which may be used in nation-building activities, and lend to other institutions. The RBI pays a predetermined interest rate to the bank. That rate is called the reverse repo rate.

On the other side, when the RBI lends money to any commercial bank or government body, it charges some interest to the borrower, and this is known as the repo rate.

Now you know the repo and reverse repo rates, so let's understand the impacts of repo rates and reverse repo rates.

Impact Of Repo Rates & Reverse Repo Rates

Decreased and lower repo rates mean that the banks can borrow more money at lesser interest rates, and they can lend them to end-users with a significant margin. When the repo rates are lower, banks offer more loans, which encourages economic activities like buying, selling, and consuming goods & services.

On the other part, when the reverse repo rates are higher, banks park their money with the RBI in the pursuit of guaranteed returns with zero risk. Though reverse repo rates are lower than interests gained from retail loans, banks still prefer lending money to the RBI to protect their working capital and enjoy a continuous growth of their idle money.

When the reverse repo rates are high, the flow of money into the economy is decreased as banks deposit more with the RBI. Higher reverse repo rates are introduced to tackle overspending and over-lending in the economy. Moreover, they are a great tool to keep the country's economic progress smooth. At times, the government and RBI need to pull money from the markets to create a balanced economy, and that's where the RBI's reverse repo rates come in. No matter what the economy's situations are, rbi rates are quite helpful in creating equal opportunities for all.

Whether you are an investor or borrower, your pocket will be affected by the recent hikes in repo rates. So let's have a look at that closely.

For Investors:

Since the money/loan is not available at cheap rates, you will see a decreased participation in stock markets and other financial markets. No investors would like to try their luck on high-interest money, and the growth of stock markets will surely slow down.

Equity markets will slow down with the immediate effect of the repo rates. Moreover, you might have already seen how the markets reacted within one hour of declaring this change. If you are an equity investor hoping for a high return generating quarter, have a look at your portfolio again, and rebalance it to adapt to slow-moving markets.

Also Read: How to leverage market volatility on your side and build a solid portfolio? 

Debt investors will also see a decrease in their earnings from the investments. As the money becomes costly, long-term debt returns will become significantly lesser, and it's good to look at short-term investments only.

If you are an avid investor, this is the time to watch from the sidelines and wait for the perfect opportunity. These rate hikes will cause the market to slow down, and eventually decrease the prices. So, if you stay in cash you can grab stocks at lesser and un

Also Read: Why debt investments are sometimes better?

FD rates will now attract more people towards them, as the interest rates will increase. If you are a believer of slow and steady growth with FD, this is the right time to make a long-term fixed deposit. 

For Borrowers:

As the RBI increases its lending rates, commercial banks will have to borrow at higher interest rates, and this will burden the borrowers too. Commercial banks will never work by decreasing their margins, and to operate their business successfully, they’ll surely increase their end-user lending rates too.

Moreover, the increase in repo rates will also affect existing and ongoing loans. The ongoing loan interest rates will soon undergo a revision, and the rates will be hiked to keep the loan rates steady for new and old loans.

On the other hand, as a fixed-rate borrower, this can be a great chance. If you plan a fixed-rate borrowing, it is better to apply today and avail a loan before the interest rates get revised.

If you are going to borrow money soon, try to avoid if it can be avoided. The interest rates will be high, and if the economy moves into recession, it will be challenging to pay back large sums with interest. If the loan is inevitable and you have to take it, look for fixed rate loans as they can be the best options in a market where the loan rates are increasing every now and then.

The country has seen significant inflation levels in the last few months, and RBI is doing everything in its command to tackle it effectively. How they perform will affect the economy, and the actual results of this rate hike will unfold in the coming times only. 

The country has seen significant inflation levels in the last few months, and RBI is doing everything in its command to tackle it effectively. How they perform will affect the economy, and the actual results of this rate hike will unfold in the coming times only.