Continuing with its aggressive stance on strong retail price inflation, the Reserve Bank of India (RBI) on Friday increased the bank interest rate by 50 basis points, which may be passed on to consumers of all external benchmark-linked loans, including home and consumer loans.
An increase of 50 basis points in the RBI’s rate is equivalent to an additional interest burden of 0.5%.
Though the central bank intends to control soaring inflation and defend the weakening rupee by this rate hike, there is a serious concern that it may also hurt the sentiments of retail loan seekers.
The latest interest rate revision announced by the RBI after Friday’s Monetary Policy Committee (MPC) meeting was the third straight increase since May. Experts believe the central bank will continue with the same approach at the next MPC meeting in September, and probably for the rest of the calendar year as well.
"The RBI has clearly taken an aggressive position on inflation even though there is no change in the forecasts on both inflation and growth. The confidence in growth gives it strong justification for attacking inflation in a big way," said Madan Sabnavis, chief economist, Bank of Baroda.
There may be another 50 bps hike during the year in this situation as inflation in the next two quarters is expected to remain above 6 per cent, he added.
The central bank sees annual retail inflation at 6.7 per cent. It expects the consumer price index-based inflation in the second quarter of the current fiscal at 7.1 per cent and at 6.4 per cent in the October-December quarter.
HDFC Bank chief economist Abheek Barua said the RBI delivered a textbook policy announcement today, one that is frontloaded and aggressive in response to inflation that remains high while the growth momentum remains reasonably positive.
He, too, expects the RBI to continue with its rate hikes in the upcoming policies, taking the interest rate up to 5.75 per cent by the end of the year.
"The bond market rally seen over the last few days is likely to reverse and we expect the 10-year paper to trade closer to 7.3-7.4% by the end of the quarter as markets price in RBI action and the supply of both SDLs (state development loans) and central government bonds this year," Barua said.
Rajni Thakur, chief economist at RBL Bank, said the markets had broadly priced in a hike of 50 bps in the repo rate and any forward guidance would have mattered more than the rate action itself.
She too was of the view that given the growth-inflation outlook, further hikes towards 6 per cent terminal repo rate seem imminent, though the pace of increase may be softer.
“Continued 'focus on withdrawal [of accommodation]' indicates further drawdown of excess liquidity as well, in which case monetary tightening is far from over," Thakur said.
RBI Governor Shaktikanta Das, while announcing the credit policy, said the MPC should persevere in its stance of withdrawal of accommodation to ensure that inflation moves closer to the target of 4% over the medium term, while supporting growth.
Dhruv Agarwala, group CEO, Housing.com, said the new repo rate will ultimately impact the cost of borrowing for India's homebuyers. However, it is also pertinent to note that past rate hikes and the consequent increase in home loan rates have so far not had any discernible negative impact on the demand for homes, he said.
“We believe that positive buyer sentiment coupled with renewed interest of investors in residential real estate will cushion some of the adverse impact of the rate hike," he added.
Das also did not offer any indication of a change in the stance or a possible pause in the next policy due in late September.
V Swaminathan, executive chairman, Andromeda Loans and Apnapaisa, said the lending rate calibration by the RBI could signal a downward trend in borrowers looking for home loans as both new and existing home loan EMIs are set to go up, ushering in a wait-and-watch attitude among new homebuyers.
Trust Mutual Fund CEO Sandeep Bagla said there are strong and stubborn inflationary impulses in the form of commodity prices and wage pressures which will go away with time and aggressive hikes.
Rate hikes could be spread out such that there is minimal impact on the performance of debt funds, Bagla said.
Rohit Arora, CEO and co-founder, Biz2Credit & Biz2X, said the policy announcement is on expected lines, demonstrating the RBI's commitment to maintaining a balance between stability and growth. With this action, the easy money era will come to an end and conditions will return to what they were before the COVID pandemic, he added.
Sampath Reddy, CIO, Bajaj Allianz Life Insurance said the RBI policy was hawkish and the MPC delivered a front-loaded 50 bps rate hike compared to market expectations of 35-40 bps.
"With the hawkish policy today, bond yields have hardened and we expect them to remain elevated in the near term. RBI's future course of action will continue to be data dependent and influenced by global factors," he said.
Suman Bannerjee, CIO, Hedonova, said there is a lot of excess liquidity in the system that needs to be flushed out.
"Inflation is currently at 7.1 per cent while the RBI's target has always been sub-6 per cent, I see additional measures coming up in the next few months," Bannerjee said.
The next meeting of the Reserve Bank's rate setting panel, the MPC, is scheduled for September 28-30, 2022.
(with inputs from agencies)