How will the RBI Monetary Policy Affect Your Borrowings And Investments
Apr 06, 2016

Author: PersonalFN Content & Research Team

As expected, the RBI reduced policy rates at its first bi-monthly monetary policy meeting for the Financial Year (FY) 2016-17. While the market’s anticipations and analysts’ estimates were running wild with the consensus building around a minimum of 50 bps of a rate cut, the actual rate cut came in at 25 bps. One basis point is a hundredth of a percent.

Monetary Policy Action at Glance:

  • RBI reduced the policy repo rate from 6.75% to 6.50%
  • It narrowed the policy rate corridor from 100 bps to 50 bps by cutting the MSF rate by 75bps and increasing the reverse repo rate by 25 basis points,
  • Reverse repo is adjusted to 6.0% and Marginal Standing Facility (MSF) to 7.0%
  • The central bank lowered the minimum daily maintenance of the Cash Reserve Ratio (CRR) from 95% of the requirement to 90% with effect from the fortnight beginning April 16, 2016.
  • CRR is unchanged at 4.0%
 

The RBI introduced many changes to the liquidity management framework as well as bringing in new measures to strengthen the banking structure, broadening and deepening financial markets while extending the reach of financial services to all. The central bank’s assessment of growth, inflation and foreign exchange reserves has also been crucial.

In short, the first bi-monthly monetary policy may look disappointing if we focus primarily on 25 bps of a rate cut. However, if you look at the broader picture, the monetary policy has been extremely effective and may have a long-term positive impact on your borrowings, savings, and investments. Let’s have a look all these aspects one by one.

Impact on borrowers...
While speaking to media, Governor of RBI, Dr. Raghuram Rajan suggested that a move of lowering policy rates by 25bps shouldn’t be viewed in isolation. Here is what he stated, “Don't look at the monetary policy review as 25 bps (cut alone). Look at the composite of measures (marginal cost of funding-based lending rate methods effective April 1), they all add up. Borrowing rates are coming down significantly in the economy.”

With MCLR coming into effect, the borrowing rates have come down by about 50bps overnight. As the cost of funds will now be adjusted frequently, which is the critical component of base rate calculation, loans may get cheaper. A few large banks have already announced their MCLR rates, which are a tad lower than their base rates. For new borrowers, the loan pricing will be done at MCLR. However, the existing borrowers whose loans are linked to the base rate will have to voluntarily switch to the new regime. Before you take any such step, bear in mind that MCLR rates would change quite frequently. Once you move from base rates to MCLR, you may not get a chance to switch back. Falling interest rates may help but be prepared for the upswing too.

PersonalFN suggests comparing stats before you switch. For minor gains, it may not make much sense to change. Let’s not forget the rising interest rate scenario, changes in the MCLR rate would be much more lucid.

How will the RBI monetary policy action impact your investments?
Apart from the central bank’s policy action, its assessment and projections affect the movement of equity as well as debt markets. The RBI expects retail inflation measured by the movement of Consumer Price Index (CPI) to slow up and hover around 5% in FY 2016-17. It sees the implementation of One Rank One Pension (OROP) and 7th Central Pay Commission. The RBI is also watchful to the upside risk emerging from the deficient monsoon. The Central Bank expects that the GDP growth will strengthen in 2016-17 assuming the positive impact of the Government’s actions, and hopefully a healthier monsoon.

Post the policy announcement, equity markets fell sharply while bond markets reacted positively to the policy action. As the RBI has taken a slew of work to improve the durable liquidity position in the system, debt markets welcomed the predictability in cash management. The RBI’s systematic approach in dealing on the Forex front also instilled confidence. Bond markets, as well as equity markets, may benefit as the lower interest rates start making the real impact on balance sheets of corporate as well as those of households.

However, as PersonalFN always advocates, please avoid speculations on the market movement and invest regularly, keeping in mind your long term goals.


 



Add Comments

Comments
arachni_text)
Jan 06, 2019

arachni_text
arachni_text
Jan 06, 2019

arachni_text"'`--
arachni_text
Jan 06, 2019

arachni_text
arachni_text
Jan 06, 2019

arachni_text)
arachni_text
Jan 06, 2019

arachni_text
 1 2 3  

Financial News. Simplified


Fund of The Week


Knowledge Center


Money Simplified Guides (FREE)


Mutual Fund Fact Sheets


Tools & Calculators