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RBI policy: If you're seeking auto, home loans, better hurry; the era of cheap money may soon be over

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) will announce its rate decision on 6 June, after a three-day meeting. The consensus among economists polled is that the rate-setting panel will adopt a hawkish stance as far as policy is concerned, and a rate hike may not necessarily happen this time.

Wednesday's decision will take into account a host of factors including the increase in inflation, a spike in crude oil prices and the resultant impact on prices across the board. The MPC may also take note of the upside risks to growth and the likelihood of the government falling for populist policies in an election year, further undermining the fiscal situation. Though it may still not go for a rate hike this time, a hawkish stance will set the tone for rate hikes later this year.

Both retail and wholesale inflation accelerated in April, mainly driven by higher fuel and food prices. CPI inflation accelerated in April to 4.58 percent, after easing for three straight months mainly driven by faster increases in food and fuel prices. The inflation based on the Consumer Price Index (CPI), a key data point factored in by the Reserve Bank while decoding interest rates, was 4.28 percent in March. CPI inflation was at 2.99 percent in April last year. Core inflation, mainly reflecting a firming up of manufacturing prices, touched 5.9 percent, or a 44-month high, economists estimated.

According to a note by ratings agency CARE, with no additional data point on inflation, inflationary expectations would play an important role. These would only be in the upward direction.
Therefore, there would be no rate change this time. The tone would be hawkish and this would likely be the consensus among the members, it said, adding that there could be an upward revision in inflationary projections for the year. The April policy projected a CPI inflation of 4.7-5.1 percent for H1 and 4.4 percent in H2. The first half projection is to be revised upwards to 4.9 percent - 5.1 percent and H2 to 4.6 percent, the CARE note said.

RBI. File Image. Reuters

RBI. File Image. Reuters

According to Naresh Takkar, MD & Group CEO, ICRA Ltd, “Although the headline and the core CPI inflation for April 2018 revealed negative surprises, an immediate rate hike may be premature, given the lack of clarity on factors like the 2018 monsoons, the minimum support price (MSPs) and fiscal risks. However, the expected rebound in the average CPI inflation for FY2019, in conjunction with the higher-than-anticipated GDP expansion in Q4 FY2018, suggests that a back-ended rate hike cannot be ruled out, which is likely to be reflected in the tone of the policy document."

Once the RBI and the MPC signal a return to the high interest rate regime, banks will not wait too long before passing on the higher rates to their customers.

The real villain in the story here is crude oil prices. A lot will depend on where global crude oil prices head from this point. A $10 a barrel increase in oil prices could push inflation by about one percentage point and reduce economic growth by 0.2 to 0.3 percentage points, a senior finance ministry official told Reuters.

In fact, banks have already begun to increase retail loan rates. This includes the country’s largest lender State Bank of India (SBI), Union Bank, Punjab National Bank and private sector lenders HDFC, ICICI Bank and Kotak Mahindra Bank.

Post the latest round of hikes, the SBI’s one-year MCLR stands at 8.25 per cent versus 8.15 percent earlier, and ICICI Bank’s start at 8.40 percent.

These rates are like to go up further if the MPC signals a hawkish stance Wednesday.

So, if you are in the market for a home or an auto loan, you better hurry, because the era of cheap money could soon be over.


Updated Date: Jun 05, 2018 12:52 PM

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