WHAT DOES RBI'S INTEREST RATE DECISION MEAN FOR YOU

The Reserve Bank of India (RBI) left interest rates unchanged during its monetary policy committee meeting during 4-6 April. It came as a bit of a surprise to the market. Especially because the last 2 inflation readings came in above the 6% mark. Usually, when inflation is high, the RBI increases interest rates to bring it under control. What's more, the RBI thinks inflation for FY24 may be a bit lower than what they earlier forecasted. This points towards a possibility that rates may now stay at these levels.

We'll break down these macro level decisions with respect to the 3 direct impact investment and expense heads on a personal finance level for you.

1. FOR BORROWERS: In the last 11 months, the RBI has increased interest rates by 2.5%. If you have taken a loan on a floating rate basis or an external benchmark linked loan, you may have noticed your EMI bills increasing quite rapidly. Banks are always quick to pass on the interest rate hikes to borrowers. This pause just may slow down the pace at which your bank is increasing interest on your loans.
2. FOR DEPOSITORS: While banks are quick to pass on higher interest rates to borrowers, they're not that quick in paying the higher rates to depositors. So you may not have seen a corresponding 2.5% increase in interest rates for Fixed deposits across different maturities. This pause may give banks an excuse to further slow down! Hence, if you're looking to lock in an FD, would be prudent to wait for a little bit before doing that.
3. FOR DEBT MUTUAL FUND HOLDERS: As soon as the RBI announced decision on interest rates, yields on the 10-year government bond came crashing, which basically means, the price of the bond increased (because yields and price are inversely related). The reason - they became "relatively" more attractive. The logic is, if interest rates in the market show signs of decreasing or staying stable, then a long term bond that's offering a fixed rate is looked at as offering a rate better than the market. However, this is just a pause in interest rates. By no means is the RBI saying that they're going to cut interest rates. Besides, there are many risks to inflation - weather, banking crisis etc. It might still be prudent to stick to short term funds. Short term bonds and funds are better in a rising interest rate environment as we have seen in the last 11 months and which we might still be in the midst of.