Fixed deposit, loan rates may Hike in a month
In its third quarter monetary policy review, the Reserve Bank of India (RBI) on Tuesday increased key policy rates.
What happened?
RBI raised the repo rate, the rate at which banks borrow from the apex bank, from 6.25% to 6.50% and the reverse repo rate, the rate at which RBI borrows from the banks, from 5.25% to 5.50%—an increase of 25 basis points (bps) for each—making money more expensive for banks. One basis point is one-hundredth of a percentage point.
The cash reserve ratio, however, was kept unchanged.
Typically, a hike in policy rates means tightening of liquidity which may translate into hardening of real interest rates. The RBI governor said on Tuesday that RBI expects banks to increase lending rates for effective transmission of the monetary policy.
What to expect
There is no doubt that interest rates on loans are set to rise, but the question is how soon. Joseph Thomas, head-investment advisory and financial planning, Aditya Birla Money, says, “I don’t think banks will hike interest rates immediately. Rates have already gone up and loans are already expensive. Even deposit rates are high.” Most bankers agree that there is an upward bias in rates and they don’t expect immediate change in loan rates. However, banks may start hiking rates on loans as well as fixed deposits in a month or so. Adds Thomas, “This 25 bps hike is small. Had it been 50 bps, there was a possibility of an immediate hike in real rates.”
What should you do?
Loans: “You should defer your plan to take a car or a personal loan by six months,” says Ranjit Dani, certified financial planner, Think Consultants, a Nagpur-based financial planning firm. Also, instead of taking a personal loan, you can look for a top-up loan or sell some investments.
However for home loan borrowers, the hike may not mean much. Says Gaurav Mashruwala, a Mumbai-based certified financial planner, “Fixed interest rate home loans are too expensive. If you are looking for a home loan which will run more than a decade, you will see several interest rate cycles. So, it does not matter if you go in for a floating home loan now. If you’ve already identified a property and documents are in place, it’s alright to go for a home loan now.”
Fixed deposit (FD): The FD rates are already high. If you are a risk averse investor, a senior citizen or a pensioner, FDs are good options. But if you can wait for a month, you may be able to get even higher rates. However, those who don’t want to pay tax on earnings from FD, it’s a good time to look into debt funds as short-term income plans are currently giving half to one percentage points higher returns than FDs.
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