The Governor of the Bank of India’s reserve (RBI) Shaktikanta Das will announce the first Monetary Policy for the New Finance Year on Friday. The central banker globally has begun to increase interest rates to extinguish inflation, but the RBI has, so far, supports economic growth and the level of left untouched.

Will we finally see interest rates up, and if yes, how does it affect you as investors or borrowers?

Will the RBI act?

RBI does a tight walk. Economic growth has begun to accelerate, but still requires some policy support. Inflation has accelerated and savers feel a cushion of real negative levels – the nominal level of interest is reduced by the inflation rate. The central bank must ensure that economic growth continues, inflation remains controlled and, at the same time, savers receive a positive real interest rate.

Bofa Securities, in a report recently, said it expects the RBI to keep the key level unchanged. It expects the central bank to revise the inflation estimate up.

“There is sufficient liquidity in the system and there are not many credit stops. RBI has supported a long-lasting economic growth that might be challenged by inflation,” said Dwijendra Srivastava, head of debts, Sundaram mutual funds. “For now, the RBI can maintain an accommodating attitude and accommodate all key rates that are constant,” he added.

Although most experts do not anticipate hikes of interest rates this week, they expect RBI to offer input on future monetary policy courses. “Even though there is no hope of an increase in interest rates tomorrow, RBI may offer several guidelines on future actions for tightening, in addition to revised inflation estimates,” said Joydeep Sen, the company’s debt coach.

Inflation and real level

Inflation is a serious challenge for the central bank also for fixed income investors. Infusion of unprecedented liquidity by the central bankers globally to fight the economic slowdown caused by Covid-19 has caused spiral inflation.

RBI, after meeting the February Monetary Policy Committee (MPC), estimates inflation at 4.5 percent, assuming normal monsoons. Indian consumer price inflation was accelerated to 6.07 percent in February 2022.

Oil shocks after the Russian-Ukrainian war can accelerate inflation. The price of fuel in India is raised in stages, and the effect of the increase must immediately reflect the amount of inflation. HSBC Global Research expects inflation by an average of around 5.6 percent in the current financial year if oil averages around $ 100 per barrel. Import inflation on crude oil accounts, vegetable oil and metal make the MPC task more difficult.

Some experts believe this will act encouragement to increase interest rates faster than later. Deepak Panjwani, Head-Debt Market, Gepl Capital, expects the RBI to switch from the attitude of the policy that is accommodating to neutral, and climbing the reverse repo level of 25 basis points on April review.

Your attitude as an investor

Most income investors remain aware of discussions about rising interest rates. The bond market has also seen a stable increase in interest rates. But there is little progress when it comes to rising in the repo level or increase material in a fixed deposit rate, which floated around 5-5.5 percent. Investors have no choice but to receive a negative real level. Even though investors may not lock their money for the long term, there is no case to sit on cash too.

“Invest at a short point depends on the frame of someone’s investment time. If interest rates rise, more informed decisions to move to a higher level can be taken after accounting for premature penalty in the existing fixed deposit,” said Sen.

Simply put, do not save money in liquid funds or bank savings accounts or deposits remain short term. Conversely invest in a fixed deposit one to two years and decide when the tariff really rises.

Short-term products

Srivastava said: “Investors are better off investing in short-duration products depending on their financial goals. Investors can also look at medium-term roll-down products provided their investment timeframe matches with the maturity profile of the bonds held.”

Although the rate hike cycle may seem to be getting delayed, long-term bond funds are best avoided. Long-term bond yields have soared, inflicting mark-to-market losses on investors. From a low of 5.76 percent on July 10, 2020, the 10-year yield rose to 6.91 percent on April 6, 2022. According to Value Research, gilt funds yielded 3.07 percent returns over the one year ended April 5, 2022. Investors in long-term bond funds may face the heat of rising rates.

“RBI may raise the repo rate by 50 to 75 basis points. But the impact on long-term government bonds may not be as much, as the bond markets have been factoring in the possible rate hikes. But for the time being, stay away from long-term bond funds to avoid volatility,” said Sen.

Panjwani also advocates investing in fixed-income avenues with a two – to three-year maturity. He expects long-term yields to rise. “Over the next three to six months, the 10-year benchmark yield should move towards 7.42-levels and going forward, the upper range of 7.75% is possible,” he said.

Given uncertainty over the extent and pace of an interest rate hike, investors would be better off with short-duration bond funds.

Will home loans become dearer?

Given the expectation of RBI holding rates tomorrow, home loan customers can breathe easy for now as many home loans given by banks are linked to the repo rate. But the low interest-rate regime is expected to end soon. So be prepared for a hike in the repo rate and consequently, an increase in the equated monthly instalments (EMI) on existing loans. New home loans, too, may get repriced up if the RBI signals the start of a fast-paced rate-hike cycle.