RBI rate unchanged: Continue with floating home loans, lock in those FDs

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

The average interest rates on outstanding rupee deposits with banks has been rising month on month for 15 straight months now. This is visible in bank FD rates that are constantly nudging up past brief periods of pauses. For consumers, this is a good time to lock into the best available rates. They can reinvest their deposits for higher rates which are typically available in the 1-3 year space. 

" Lock in your FDs at interest rates higher than 7 or 8 per cent will give good corpus to senior citizens who earn .50 basis points higher interest than others. The best-paying tenors are seen to be between 1 and 3 years," said Adhil Shetty, CEO of Bankbazaar.

"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 

For home loan borrowers, fixed-rate loans may be available in the market at some discount compared to floating-rate loans. However, since rate cuts are expected in the foreseeable future, it is better to continue with floating interest rate loans for now.”

 "A steady repo rate implies stability in the interest rates offered by banks. Home buyers who have taken loans or are planning to take loans for purchasing property can benefit from the unchanged repo rate as it may lead to consistent or slightly lower borrowing costs," said Adhil Shetty, CEO of Bankbazaar.

Despite the repo rate shooting from 4.00 to 6.50, interest rates on new floating home loans have stabilized and fallen. BankBazaar looked at five large lenders who were lending between 6.50 to 6.70 per cent in March 2022. Three of them peaked at 9.00 or higher in April 2023. In August 2023, four are now lending between 8.40 and 8.60. 

 

Data sourced from Bankbazaar is  from first Friday of previous months and subject to revision. Lowest HL rates; FD rates show highest rates for tenors ranging from <1 years to 3 years. Rates as advertised by lender's websites. HDFC rates: NBFC for home loan up to July 2023. FD rates for small deposits for depositors under 60.

"Eligible borrowers paying above the market rate can consider a loan refinance or balance transfer to ensure savings through these inflationary times.," said Shetty.

 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.

Mutual funds: 

Investment in mutual funds is a long-term strategy, repo rate may or may not impact much for investors looking at 5, 10 or longer investment horizons to let their funds grow.

"You can opt for the funds that have generated consistent and higher returns in the past and begin your mutual fund investment journey after evaluating your risk appetite and financial goals," said Shetty.

What about markets?

 Indian equity markets have seen a tremendous momentum in the last couple of months. The repo rate decision is likely to maintain this positivity among investors.

Add duration to your portfolio

" 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.

Retain position
"With RBI placed comfortable with CPI level of 5.5 and GDP at 6.6, it augurs will for the market and in short term. The short-term dip in the market, if any, may be seen as an opportunity to buy stocks. In all probability, we might see a rate cut of 25 bases next to the next policy meet. With easy liquidity and stable rate with downward bias going forward, investors can retain their positions or portfolio for now," said Milan Sharma, Founder and MD, 35North Ventures, SEBI Accredited VC Firm in India.

"There has been a flattening and selling pressure on equity in aggregate as a result of result of rate hikes, which might find some relief in the short term in response to the zero-hike announcement.  However, that neither indicates it’s time to buy nor that it’s time to sell. For those invested in the index or any other broad-exposure fund, in aggregate, and over the long term, Indian equity continues to enjoy a buy rating.   For most investors, time-in market is going to be a much more significant indicator of returns and success than timing the market," said Utkarsh Sinha, Managing Director, Bexley Advisors.

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!