Here's how the next round of RBI repo rate hike could impact financial markets

Another round of repo (repurchasing option) rate hike is expected next week. Here are some ways in which the RBI rate hike could impact the financial markets.

Increase in FD rates
“Rising interest rates will impact borrowers and investors. A rate hike is amongst the various steps that the Reserve Bank of India is taking to control spiralling inflation. Rising repo rates lead to a rise in fixed deposit (FD) rates, making now a suitable time for investors to park their funds in FDs. With taxation benefits of debt funds now removed, FDs may now be a better investment option for realising short-term goals of up to three years. To maximise returns, you could explore the FD laddering strategy by creating multiple deposits of varying maturity tenures," says Adhil Shetty, CEO, BankBazaar.com.

Time to diversify portfolio?
"While FDs may be geared towards providing capital safety, they lag in yielding inflation-beating returns. Considering that, diversifying your portfolio with instruments, such as equity mutual funds and gold, based on your risk appetite, is the key to creating a sound financial plan," Shetty says. 

Homeloans to get more expensive
"On the other hand, borrowers, especially home loan borrowers will find their loans getting costlier in the event of a future rate hike. What’s interesting is, that while home loan interest rates are trending at pre-pandemic levels, home loan interest rate spreads are currently at a three-year low, with the current lowest at 1.95," Shetty says. 
  
"Existing borrowers should now check the spread they are paying. If the spread is higher over the repo rate, refinancing the loan could help. Since home loan spreads continue to remain unchanged for the tenure of the loan, new home loan borrowers would lock into a very low spread right now which would continue for the rest of their loan tenure. So, when interest rates begin to drop along with the repo rate, borrowers may be able to pay off a 20-year loan in 15 years,” he adds.

The rate hike could lead to further pressure on homebuyers claims Manoj Gaur President, Credai NCR and  CMD Gaurs Group. He says, "There has been a continuous increase in the repo-rate every quarter since 2022 this has led to much higher interest rate for home buyer which may now deter the homebuyer as home loan rates will be at an all-time high. The sector is already dealing with high construction cost due to gradual increase in the rates and a further increase will affect the developers financially leading to certain projects becoming unfeasible. Real estate industry being the second largest employer supports more than 360 industries and any reduction in demand in Real estate has a multiplier effect on related industries."