Out of the blue, the Reserve Bank of India (RBI) made a swift decision to hike the interest rate on May 4, from 40 basis points (BP) to 4.4 percent. So far it is the highest interest hike rate in history done by RBI. If you’re wondering how come it affects your investments and how the new interest rate can alter the regular courses, the answer is simple. A new momentum is going to show about your fixed deposit rate.
The incentives behind the rate hike
RBI rate’s hike is because of inflation, by increasing the repo rate RBI wants to reduce liquidity. And now, since RBI is charging higher interest rates to banks like ICICI, and HDFC, they will charge higher interest rates on home loans, vehicle loans, etc. Thus, making borrowing loans less lucrative and creating a spark in the reverse repo rate.
The world economy is in a personal crisis, biting the dust, because of high bottled-up demand, cash on hand because of Covid-19 footsteps, and high input costs because of the Ukraine war resulting in inflation on a tight clutch. Had there been no excess cash on hand, the demand side would not have surged so high. If there had not been a disruption in the supply chain, crude prices and food prices would not have been so high.
The aftermath of RBI’s decision
“The timing of RBI’s rate hike came as a surprise, but not the action itself, as people thought it should have been done, anyway.” cited Finance Minister Mrs. Nirmala Sitharam.
Now that U.S Federate and the RBI rate have gone up and are going to go up further in the future, initiating a cascade of savings spree. The stock market will take a spill and unemployment will get to see a new hike. Unless or until the inflation gets diminished to 4-5%.
RBI’s governor Mr. Shaktikanta Das stated in his official statement that “the tectonic shifts caused by the conflict in Europe which had created fresh challenges for global growth and the conduct of monetary policy. As the war draws on and sanctions and retaliatory actions intensify shortages, volatility in commodity and financial markets, supply dislocations, and most alarmingly, persistent and spreading inflationary pressures are becoming more acute with every passing day. Debt distress is rising in the developing world amidst capital outflows and currency depreciation”.
As the Ukraine war slows in the upcoming months, the US perpetually makes its oil supply to Europe, giving a high rise in Russian oil imports for India. This can become a key point in turning the tides swiftly.
If every card plays in India’s favor, this will be a temporary situation. Within a year (minimum) India can recover from the interest hikes and make the demands adequate and control the inflation rate.