Home / Money / Calculators /  Policy rates, and your EMIs, stay same

The Reserve bank of India (RBI), as widely expected, left the policy rates unchanged in its second bi-monthly monetary policy statement on Tuesday. However, the central bank did cut the statutory liquidity ratio (SLR) by 50 basis points to 22.5%. SLR is the proportion of net demand and time liabilities that banks are required to maintain in specified instruments. One basis point is one-hundredth of a percentage point.

Although the central bank did not cut rates, the tone of the policy statement suggests that interest rates may not go up further from the current level. “If the economy stays on this course, further policy tightening will not be warranted. On the other hand, if disinflation, adjusting for base effects, is faster than currently anticipated, it will provide headroom for an easing of the policy stance," Raghuram Rajan, governor, RBI, said in his policy statement. As a result, at the end of the day’s trade, the S&P BSE Sensex was up 173.74 points or 0.70%.

Going by the statement, it looks unlikely that the rates will go up from the current levels. However, a rate cut will depend on many factors that could have an effect on the inflation trajectory in the short to medium term. Therefore, it is unlikely at this stage that your loan equated monthly instalments (EMI) will go up from the present levels. However, a relief at this end may take some time.

Stock market reaction

The stock market for now is more focused on action in New Delhi and is not particularly worried about the monetary policy. “For now, Mumbai is out of the picture, except for flows from the foreign institutional investor. The budget will be the next big event for the market," said U.R. Bhat, managing director, Dalton Capital Advisors (India) Pvt. Ltd.

Since the possibility of a rate hike is low at this stage, and the growth outlook is likely to improve, is it time for investors to pay closer attention to rate sensitive sectors, which have also gone up in the recent past (see chart)?

“But there is no hurry. Investors can slowly move towards the rate sensitive stocks," said Daljeet Kohli, head of research, IndiaNivesh Securities Pvt. Ltd, adding that investors should take care to be stock specific and not sector specific. Avoid companies that have gone up recently without fundamental backing, he said.

Lending and deposit rates

The monetary policy outcome is unlikely to have an impact on the lending and the deposit rates. “After this policy, I don’t expect any changes in deposit as well as lending rates," said Vaibhav Agrawal, vice-president (banking research), Angel Broking Pvt. Ltd. The cut in SLR will not have an immediate impact on banks as their holding is more than what is required.

The opinion is shared by others. “Since the key rates have been kept unchanged and the SLR cut will have no impact in the short term, lending and deposit rate will remain unchanged," said Hatim Broachwala, senior research analyst, Karvy Stock Broking Ltd.

Debt funds

Since there is a good chance that the interest rates will not go up from the present level, should fixed income investors look at debt funds?

“We believe that the bond market may be ripe for a rally over an 18-month-plus time frame if the inflation does not stray away from the RBI’s comfort zone," said Vidya Bala, head-mutual funds research,

So what kind of funds should you have in your portfolio? “For those with less than one-year investment time frame, ultra short-term and short-term debt funds would provide sufficient returns without taking undue risks or enduring volatility. For investors with a time frame of two years and above, income funds that have a mix of corporate and government bonds would provide sufficient opportunity to ride any price rally in bonds when rates fall. However, such a holding would mean flat returns in the short to medium term, and hence would not be suitable for those seeking instant gratification," she said.

Easier movement

The RBI has decided to allow all resident individuals to remit up to $1,25,000 per financial year under the Liberalised Remittance Scheme (LRS) without end-use restrictions except for prohibited foreign exchange transactions such as margin trading, lottery and the like. Since August 2013, the eligibility limit for foreign exchange remittances under LRS was restricted to $75,000. Prior to that, individuals were allowed to remit up to $200,000 per financial year for any permissible current or capital account transaction or a combination of both.

The central bank has also allowed all individuals (except residents of Pakistan and Bangladesh) to carry Indian currency notes up to 25,000 while leaving the country. So far, only Indian residents were allowed to take Indian currency notes of value up to 10,000 out of the country. Non-residents visiting India were not permitted to take out any Indian currency while leaving the country.

The central bank said this was done to facilitate travel requirements of non-residents visiting India.

Mint Money take

The review of the monetary policy, as widely anticipated, was a non-event for the markets. The stock market is now interested in policy action by the new government. The Union Budget in July will be the next big event that is likely be the guiding factor for the stock market in the short to medium term.

For individuals, not much changes in terms of interest inflow (from, say, bank fixed deposits) or outflow (on loan repayments). For the debt fund investor, experts advice ultra short-term and short-term debt funds. For those travelling to or from India, money movement will be freer.

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