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Tag: monetary policy

  • Why The Market Always Reacts To The Fed’s Interest Rate Hikes – Part 2

    Here are some more ways in which rate hikes by the Feds and the RBI can affect your money.

    Mortgages Become Costlier

    If the Fed raises interest rates again, people who need to borrow money to buy a house or use their home’s equity to pay for something else will likely have to pay more in the coming months.

    Some economists said at the beginning of this year that rates would reach their highest point in the summer. Midway through June, the 30-year fixed mortgage reached 5.81%, and economists predicted that rates would be in the low 5% by the end of the year.

    But as the economy got worse and the Fed kept raising rates quickly, mortgage rates hit a new 20-year high of 7.08% in the middle of November, which was higher than most predictions for the year.

    Since then, home loan rates have gone down a bit. According to Freddie Mac, the average rate for the week ending December 8 was 6.33%.

    The bond market, which often responds to what the Fed does, has a direct effect on mortgage rates.

    The Fed’s rate hikes in 2022 were one of the things that drove up mortgage rates earlier in 2022. The recent drop in rates has been helped by investors’ strong demand for mortgage bonds. That’s because the economy seems more stable and Fed rate hikes, especially when they’re small, no longer come as a surprise.

    But the Fed funds rate is directly tied to shorter-term home loans with floating rates, like adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs). This means that when that rate goes up, the rates for ARMs and HELOCs go up soon after.

    Even though mortgage rates are still high compared to 2021, when they were at their lowest, not everyone thinks that this is a bad thing. Some people in the real estate business think that raising rates is one way to cool down a housing market that is too hot. After years of low borrowing costs, some people think it’s time to get back to normal.

    Housing experts say that people who want to buy now should think about locking in the best interest rate, since rates can go up even by the hour. Rate locks usually last at least 30 days, but some lenders offer longer locks, usually for a fee.

    It is hard to know for sure if you have locked in the lowest rate possible, but you can always refinance later if rates go down.

    3. Interest rates on savings accounts are going up, but slowly.

    A higher federal funds rate is good for savers, whose savings account rates have been slowly going up.

    There is no direct link between federal funds and deposit rates, but banks are steadily raising the annual percentage yields (APYs) they pay on deposit accounts like savings accounts, money market accounts, and certificates of deposit (CDs).

    Rates go up to attract deposits, but banks have a lot of cash on hand right now, so they can take their time raising yields.

    APYs on deposits will go up faster or slower depending on where you bank. Online banks, smaller banks, and credit unions usually have better yields than big banks, and they’ve usually raised rates faster in the past few months because they’re competing more for deposits.

    If you want a better return on your money, you might do best to put it in an online bank or credit union. Since January, the average rate on a savings account has gone up from 0.06% to 0.24%, but the best high-yield savings accounts pay up to 5% APY on some deposits.

    Where you keep your cash is important, especially when inflation is rising.

  • Why The Market Always Reacts To The Fed’s Interest Rate Hikes – Part 1

    The Federal Open Market Committee (FOMC) announced on December 14 that the federal funds rate would go up again, this time by 50 basis points, to a range of 4.25% to 4.5%.

    This move comes after the central bank raised interest rates by 75 basis points in June, July, September, and November, and by smaller amounts in March and May. All of these moves were part of the central bank’s plan to combat persistently high inflation.

    Even though the committee noticed that the job market was strong, it decided to raise rates because of the continued gap between supply and demand and the ongoing conflict in Ukraine.

    The FOMC has maintained that the Committee expects that ongoing increases in the target range will be appropriate to achieve a monetary policy stance that is sufficiently restrictive to return inflation to 2% over time.

    Inflation can take a long time to return to normal, which can be detrimental for consumers who are already struggling. It also takes a few months for changes in Fed policy to make their way through the economy. But it’s important to remember that some of the policies’ financial effects, like higher interest rates on borrowed money, can be felt more quickly.

    How the Fed’s rate hike can affect US citizens in 3 ways. In a similar manner, when the RBI increases the interest rate in India, your money will be affected.

    Interest on credit cards is becoming more expensive
    When the Fed raises interest rates, it costs you more to carry a balance on your credit card. This is because the interest rates on consumer debt, like a credit card balance, tend to move in lockstep with the federal funds rate.
    The interest rates that commercial banks charge each other for short-term loans depend on this key interest rate. When the fed funds rate goes up, it becomes more expensive to borrow money, which can make banks and other financial institutions less likely to borrow money.

    The banks pass on the higher costs of borrowing by raising the interest rates they charge on loans to consumers. Most credit card companies base their annual percentage rate (APR) on the prime rate, which is the rate banks charge the customers with the least risk for loans, plus a percentage to cover costs and make a profit.

    But most APRs are variable, which means that when you get a new credit card, the interest rate you agree to pay can change based on the prime rate. So, if your credit card’s annual percentage rate (APR) is 18.15 percent and the Fed raises the federal funds rate by 75 basis points, your issuer is likely to raise your APR to 18.90 percent.

    The cost of carrying a credit card balance goes up as the interest rate on that balance goes up. Consider paying off as much of your debt as possible or using a balance transfer card with 0% APR to reduce how much extra money you’ll have to pay on your debt.

  • Key Monetary Policy Terms That Every Investor Should Know – Part 2

    In the previous article, we learned about 4 key monetary policy terms like LAF, CRR, Repo rate and reverse repo rate. Here are a few more important terms that you should know to understand MPC policies. Want to track your trades and investments smoothly? Then Zebu’s online trading platform is the answer to it. As the best Indian stock broker company we not only have the best technology but also have the lowest brokerage for intraday trading.

    5. Statutory Liquidity Ratio (SLR) The statutory liquidity ratio is the amount of money that banks must keep in liquid assets at all times. But banks can’t keep these funds in cash. Instead, they need to keep them in government securities, bonds, or precious metals. The CRR and the SLR both affect how much money commercial banks can lend to people who want to borrow it. If the RBI keeps these two rates too high for too long, banks will be less likely to lend money. It would be hard for people who want to borrow money and are in this situation.

    6. Base Rate This is the lowest interest rate that a bank will charge a customer when they lend them money. It is up to the bank’s management, and RBI has no say in the matter. But banks don’t usually lend money at that interest rate to people who want to borrow money. When lending money, banks usually charge an extra amount on top of this base rate.

    7. Long-Term Repo Operations (LTRO) In 2020, RBI took a revolutionary step by putting the LTRO tool on the market to control the repo operations. In LTRO, RBI lends money to banks for a set period of time, usually between 1 and 3 years, at the current Repo Rate. In return, banks offer Government Securities with the same or longer maturity period. In 2019, RBI’s six monetary policies have lowered rates by almost 135 basis points (bps), but banks haven’t even given customers half of the benefit. In the LTRO system, the RBI thinks that giving banks stable, longer-term cash at the repo rate can help them lower the rates they charge for loans to consumers and businesses while keeping their margins. LTRO is used to add money to the market and make sure that credit keeps flowing to the economy.

    8. Targeted Long-Term Repo Operations (TLTRO) This is the same as LTRO, but the main difference is that TLTRO uses the money borrowed from RBI to buy investment-grade corporate bonds, commercial paper, and non-convertible debentures. 9. Marginal Standing Facility (MSF) Marginal Standing Facility is a Liquidity Adjustment Facility (LAF) window that RBI opened in May 2011. It is the rate at which banks can borrow money from the RBI for one night in exchange for approved government securities. The question is: If banks can already borrow from the RBI through the Repo Rate, why do they need MSF? This window was made so that commercial banks could borrow money from the RBI in times of emergency, like when inter-bank liquidity runs out and overnight interest rates change a lot. So, the main goal of the MSF is to keep the overnight inter-bank rates from being too unstable.

    Now that you have a deep understanding of these MPC terms, the next time the RBI releases an update, you can see how the stock market is affected with some extra context. Zebu’s online trading platform is the answer to all your bad tech problems. As the best Indian stock broker company we not only have the best technology but also have the lowest brokerage for intraday trading.

  • Key Monetary Policy Terms That Every Investor Should Know – Part 1

    The Reserve Bank of India sets the rules for how the economy works as a whole. It is the demand-side economic policy used by the government of a country to reach macroeconomic goals like inflation, consumption, growth, and liquidity. It involves managing the amount of money in circulation and the interest rate.

    In India, the Reserve Bank of India’s monetary policy is meant to control the amount of money in order to meet the needs of different parts of the economy and speed up the rate of economic growth.

    The RBI uses open market operations, the bank rate policy, the reserve system, the credit control policy, moral persuasion, and many other tools to carry out the monetary policy. If any of these are used, the interest rate or the amount of money in the economy will change. Monetary policy can either make the economy grow or shrink. An expansionary policy involves making more money available and lowering interest rates. A monetary policy that makes money tighter is the opposite of this. For example, for an economy to grow, liquidity is important. The RBI depends on the monetary policy to keep enough cash on hand. By buying bonds on the open market, the RBI adds money to the economy and brings down the interest rate.

    Here are some important terms you should know if you want to understand how monetary policies work. Before we get on to understanding monetary policies there is one of the few things such as — technology that plays a huge part in investments. As an online trading company we offer the best trading accounts and the best stock trading platform to make your investment journey smooth.

    1. The Liquidity Adjustment Facility (LAF)

    It is a tool used by the Reserve Bank of India (RBI) to manage liquidity and keep the economy stable. LAF covers both Repo and Reverse Repo Operations. It was made by RBI after the Narasimham Committee on Banking Sector Reforms suggested it (1998). It helps keep inflation from getting out of hand.

    2. Repo Rate

    Repo Rate is the rate at which commercial banks borrow money from the Reserve Bank of India (RBI), usually against Government Securities. So, to keep things simple, if the RBI wants more money to flow into the economy, it lowers the Repo Rate, and vice versa. So, when banks borrow money at a lower rate of interest, they also lend money at a lower rate, and the opposite is true when RBI raises the Repo Rate. For example, if RBI lowers the Repo Rate by 25 bps, which stands for “25 basis points,” this means that RBI has lowered the rate by 0.25 percent. So, 1 bps = 0.01 percent . In most Repo operations, banks borrow money from RBI for one day at a time. Most believe that banks haven’t cut interest rates by the same amount that the RBI has done for banks. So, the answer is that the banks don’t have to all cut by the same bps. Even so, it’s up to the banks to decide whether or not to lower them, and if they do, by how much bps. The reason for this is that banks take into account different factors, such as their interest rate on other sources of funding, their NPAs (Non-Performing Assets) for the same period, their operational cost, and their cost of customer acquisition, the target segment they are lending to, etc.


    3. Reverse Repo Rate

    The Reverse Repo Rate is the rate at which RBI borrows money from banks for a short time and pays interest to banks for the same. When banks have more cash on hand than they need, they sometimes leave it with the RBI so they can earn interest on it. So, when the RBI wants to slow the flow of money through the system, it raises the Reverse Repo Rate. This makes it more profitable for banks to invest in Government-backed securities instead of lending money to risky market borrowers. The equation basically says that if the Reverse Repo Rate goes up, the interest rate on all loans goes up, and if the Reverse Repo Rate goes down, the interest rate on most loans goes down.

    4. Cash Reserve Ratio (CRR)

    Banks have to put a certain percentage of their Net Demand and Time Liabilities (NDTL) in the form of cash with RBI. This is called the Cash Reserve Ratio. This CRR has to be kept up-to-date with RBI every day. If it isn’t, the banks at that time will have to pay a fine and interest. RBI requires banks to keep this ratio in order to control the flow of credit in the market. By lowering the CRR, RBI makes more money flow into the economy. If it wants to stop the flow of money, it lowers the CRR. The interest rate that banks charge on loans has nothing to do with whether or not the CRR rate goes up or down. But if CRR goes up, the flow of money in the market goes down, and if the demand for credit doesn’t go down at the same rate, interest rates will have to go up.

    These are a few of the important terms that you should know about during MPC meetings. In the next article, we will share a few more of the MPS terms for your reference.

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