After the repo rate hike on Wednesday, at least four lenders - HDFC Bank, Kotak Mahindra Bank, Karnataka Bank and Union Bank of India -- has hiked their MCLR by 5-20 bps.
The interest rates on bank fixed deposits are among the first to respond to a change in repo rates. So if you're planning to put some money in a fixed deposit and the repo rate rises, you stand to gain. The vice versa applies in case the repo rate falls. However, your existing FDs will continue to bear the interest rate at the point that you investment.
This principle also applies to corporate bonds.
Recently, State Bank of India (SBI) hiked its deposit rates by 5 to 10 bps. The hike will translate into higher interest earnings for cutomers opening fixed deposits with the bank.
However, a repo rate hike will adversely impact those who've invested in long-term debt funds. This is because the investments made by such funds will have to start matching the yields offered by newer instruments. And that can only happen when their prices move south.
As evident from the decline in their stocks the past two days, the rate hike isn't good news for banks.
The RBI's move will mean that banks would have to pay a higher interest on their borrowings from the central bank, resulting in an increase in their cost of funds.
Moreover, the increasing interest rates will deter likely borrowers, who might decide to wait for a rate cut before taking any loan from banks. As interest from loans
is a major source of income for banks, a decline in borrowings could have a major bearing on their earnings. The banks, which are already under the huge burden of NPAs, might also see a surge in bad loans
as borrowers are more likely to default if interest rates move up.
The rate hike will increase the cost of doing business for companies, as they would have to pay a higher interest on their loans.
"The cost of doing business goes up because of the hike and it will impact capex (capital expenditure) by the industry," Confederation of Indian Industry (CII) president and vice-chairman of Bharti Enterprises, Rakesh Bharti Mittal recently told reporters.