Why a rate hike is not all bad news for you – and how you can take advantage of rising interest rates
- India’s central bank, the Reserve Bank of India, is expected to announce its second rate hike later this week.
- RBI’s interest rate hikes come after inflation surged across the board, making everything from groceries to electronics expensive.
- For the common people, interest rate hikes also mean that loans and EMIs will get expensive.
- But you can still benefit from a rising interest rate regime – here’s how.
AdvertisementIndia’s central bank is expected to announce another rate hike this week, after a sudden rate hike last month. The Reserve Bank of India’s (RBI) rate hike shows that the bank wants to control inflation before it goes out of hand, instead of focusing on growth.
The first and foremost casualty of RBI’s rate hike were the interest rates on loans – home loan interest rates, especially, were at a decadal low. When the RBI hiked interest rates, it increased the cost of borrowing for banks, which in turn passed it on to common people like you and I by hiking interest rates on loans.
Since RBI’s rate hike announcement on May 4, SBI, ICICI Bank, HDFC, Punjab National Bank and Bank of Baroda have all hiked their repo-rate linked and home loan interest rates by 40 basis points, with the new rates ranging between 7-7.8%, depending on loan term, amount, type and credit rating, among other things.
This was RBI’s first rate hike in 45 months – the last rate hike was in August 2018. Essentially, this could mean that the era of low interest rates is over.
But that’s not all bad – sure, if you have a big loan or anticipate new borrowings in the future, you will end up paying more.
Why rising interest rates are not all bad news
After hiking lending rates, banks turned around and announced an increase in fixed deposit rates.
These are the interest rates of some of the popular FD schemes offered by banks on deposits of less than ₹2 crore.
|Bank||Term||Old rate||New rate|
|Kotak Mahindra Bank||390 days||5.20%||5.50%|
|Kotak Mahindra Bank||23 months||5.25%||5.60%|
|Bandhan Bank||1-2 years||5.25%||5.75%|
|IDFC First Bank||1-3 years||5%||6%|
|Yes Bank||1 year||-||5.75%|
|IndusInd Bank||1 year||-||6%|
Senior citizens can get an additional interest of anywhere between 0.5-1% across these FD schemes. This will also come as a relief to pensioners, especially at a time when the government has approved a cut on employees’ provident fund (EPF) interest rates to 8.1%.
AdvertisementFor deposits over ₹2 crore, the government-owned State Bank of India has increased interest rates from 3.6% to 4.25% for a term of 2-3 years. For deposits with a longer term, the interest rate has been hiked to 4.5%.
How to take advantage of rising interest rates
Rising interest rates aren’t all gloomy – there are still ways in which you can ensure your money grows. Here are some avenues:
Investing in banks and cash-rich companies
More specifically, you can invest in banks and cash-rich companies. The primary source of income for banks is interest income. In a rising interest rate environment, lenders benefit and their interest incomes also see an increase.
AdvertisementCash-rich companies, on the other hand, can utilise their surplus cash to fund their new investments, projects and other capital expenditure. Cash-rich companies, or companies with less debt, will end up paying less towards interest when compared to companies with relatively more debt.
Lock in your current interest rates
If your loan provider offers you an option to lock existing interest rates, you should consider it. Central banks around the world have started hiking interest rates to control inflation – and this could go on for a while.
Additionally, if you are planning any major purchase or investment – like a new house – you might want to consider purchasing it now when interest rates have still not spiked too much.
Note: This is not investment advice. It is just for informational purposes.
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