RBI hikes repo rate after 4 years, Loans to get Expensive

Effecting the first hike since the NDA government came to power at the Centre, the Monetary Policy Committee (MPC) of the RBI on Wednesday raised its key policy rate, the repo rate, by 25 basis points to 6.25 per cent. This is expected to result in higher lending rates on housing, auto and other personal loans.

Usually when RBI hikes repo rate, banks typically pass on the burden to customers. It is almost always the State Bank of India (SBI)—the country’s largest lender—that leads the rate cut cycle with other banks following suit.

If the banks do indeed decide to pass on the hike, then home, auto and other loans are set to get costlier.

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.

However, just days ahead of RBI’s monetary policy review, India’s three major banks — SBI, PNB and ICICI Bank — last week already increased benchmark lending rates or MCLR (Marginal Cost of funds based Lending rate) by up to 0.1 per cent, making loans costlier for consumers.

Most home and auto loans are linked to MCLR which means that higher lending rates indicate that the equated monthly instalments (EMIs) on loans will go up. Banks are yet give any indication whether they are planning to make loans even more expensive, in the backdrop of Wednesday’s hike.

Last week, SBI increased the lending rate by 10 basis points across all tenors up to three years. Currently, SBI’s overnight and one-month tenors’ MCLR stands at 7.9 per cent as against 7.8 per cent, according to the bank’s website.

The MCLR for a three-year tenor increased to 8.45 per cent from 8.35 per cent earlier.

State-owned Punjab National (PNB), the country’s second largest lender, raised the MCLR for three-year and five-year tenors to 8.55 per cent and 8.7 per cent, respectively last Friday following SBI.

While the country’s second largest private bank ICICI Bank too last week said it has raised five-year tenor MCLR by 10 bps to 8.70 per cent. It has also raised the MCLR by 10 bps in loans with tenor of one year and three years.

What is also important to note is that the central bank on Wednesday hiked the reverse repo rate– the rate at which it borrows money from commercial banks — to 6 per cent. In case banks are able to mitigate the repo rate pain thanks to this, then lenders may stay put on rates.