Loans to get expensive as RBI hikes repo rate after 4 years
This is the first time RBI has hiked the repo rate since January 2014, making it the first increase during the Narendra Modi government’s regime. The policy rate was 6.25% till August 2017, when RBI had cut it by 25 basis points.business Updated: Jun 07, 2018 11:35 IST
Home and car loans will get dearer, although fixed deposits could get more remunerative, after the Reserve bank of India (RBI) increased the policy rate by 0.25 percentage points to 6.25% from 6%.
This is the first time RBI has hiked the rate since January 2014, making it the first increase during the Narendra Modi government’s regime. The policy rate was 6.25% till August 2017, when RBI had cut it by 25 basis points.
The central bank increased the rate to combat inflation, which has been on the rise; it also increased its inflation forecast by 0.30 percentage points to 4.7% in the second half of the year. That could mean another interest rate hike later in the year.
If there’s any cheer for borrowers, it’s that most banks had already started increasing their interest rates, perhaps in anticipation of the RBI rate increase, and may not immediately effect another sharp increase. Shikha Sharma, the CEO of Axis Bank said “there are many measures that will help provide relief to banks and help in not raising rates sharply”. But especially because RBI?anticipates inflation to rise further, and could increase the policy rate again later this year, it is likely that banks will continue to keep consumer loan rates tight, analysts say.
Over the past four months, top banks including State Bank of India, Punjab National Bank, Bank of Baroda, ICICI Bank Ltd and Kotak Mahindra Bank Ltd have increased the interest rate on home loans, car loans and personal loans by between 5-20 basis points. A basis point is a hundredth of a percentage point. “The MCLR (marginal cost of funds based lending rate) has already been increased. Even non-banking finance company, HDFC Ltd (India’s biggest mortgages company) , has increased lending rates. The market moved probably ahead of the curve in terms of lending rates. You have already seen the transmission,” said Shanti Ekambaram, president-consumer banking, Kotak Mahindra Bank Ltd.
On Rs 50 lakh loan, at 8.50% for a 30-year tenure, a hike of 25 basis points would mean that the monthly instalment increases by Rs 889.
Along with raising loan rates, banks have also been increasing fixed deposit rates, which means they too are unlikely to rise sharply after the RBI action. Over the past few months, fixed deposit rates have increased by 15-20 basis points. “I had anticipated a rate hike. If you look at the banking system, in the last 30-40 days banks had already started increasing deposit rates. This was a factor of liquidity as well. The system went into negative liquidity and the rates in the wholesale market went up sharply. Going forward, deposit rate will be a function of demand and supply. Deposit rates have already gone up by 15-20 bps,” said Ekambaram.
Most analysts say that with money continuing to be tight, fixed deposit rates will continue to increase, but gradually.
The stock markets, which surged after the RBI?action, have already factored in a rate increase, analysts say. “The rate hike is in line with the expectation. For equity market things are a bit complicated because the driver of equity market is oil price, political situation, monsoon and how the earnings are moving up in the economy. Interest rate will play a very small role in impacting earnings. So for equity market, the RBI credit policy is behind them. The equity market will be more focused on other economic development,” said Nilesh Shah, managing director, Kotak Asset Management Co. Ltd.
The real indicator of what will happen to interest rates, according to most analysts, is the bond markets. And they seem to think more rate hikes are in store, which means consumer loan rates could go higher. “For the government securities market and longer duration bonds there is still a lot of pressure yet to come. Typically, when RBI starts a rate hike cycle, it doesn’t stop at one. So we are expecting that RBI will do a series of rate increases. In that environment, we expect longer duration bond to remain under pressure,” said R. Sivakumar, head-fixed income, Axis Asset Management Co. Ltd.