How RBI’s policy call affects you and key sectors
After two successive rate hikes, the Reserve Bank of India (RBI) kept key policy rates unchanged, though the stance changed from neutral to “calibrated tightening”. ‘Mint ‘analyses the impact on the rupee, the markets, consumers and non-banking financial companies (NBFCs)
1. What could be the impact of RBI’s policy action on lending rates?
RBI’s decision to keep policy rates unchanged, combined with the shift in stance to calibrated tightening, spells uncertain times for consumer finance and homebuyers. Banks are still likely to increase lending rates, thereby affecting borrowers’ EMI payments. Many banks are expected to reset their lending rates over the next few weeks to align them with the central bank’s two previous interest rate increases. In addition, the stance of “calibrated tightening” may imply that the future rate cycle will primarily be one of rising interest rates.
2. What will be the likely effect on the rupee?
The rupee crossed 74 against the dollar after RBI decided to hold policy rates. A rate hike would have made domestic debt more attractive to foreign investors, reversing the trend of capital outflows. RBI offered incentives to foreign investors by easing rules that will likely encourage them to hold Indian fixed income paper issued by the government and the private sector for longer periods. On 9 Sep, the rupee had weakened 5.6% in nominal effective terms since March; in real effective exchange rate terms, this worked out to 5%. RBI’s response has been to ensure the forex market remains liquid with no undue volatility.
3. How will bond and equity markets be affected?
Experts say equities will stay weak. With respect to bonds, RBI policy will offer short-term relief, but traders aren’t changing their longer-term views as there is room for rate hikes.
4. How is the economy likely to be affected?
RBI warned that global headwinds in the form of escalating trade tensions, volatile and rising oil prices and tightening of global financial conditions pose substantial risks to the growth and inflation outlook. It is, therefore, necessary to further strengthen domestic macroeconomic fundamentals. On inflation, too, RBI called for a closer vigil over the next few months because as the output gap virtually narrows and demand generation picks up, these could trigger several upside risks.
5. How will NBFCs be impacted by the RBI policy decision?
RBI warned that the NBFC sector had been resorting to higher market borrowing in the form of commercial paper, which could lead to asset-liability mismatches (ALM). The central bank said it was trying to strengthen ALM guidelines for NBFCs to avoid rollover risk in the future. It could also tighten norms pertaining to core investment companies. The framework for them is that they must work on a debt-equity ratio of 2.5 at the entity level, not at the group level.
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