Expect your equated monthly installments (EMIs) of loans to go up after the Reserve Bank of India (RBI) on Wednesday hiked interest rates by 0.25% for the first time since January 2014, the first from the Modi regime. However, all big banks that revised rates last week may not raise rates immediately, while others are likely to hike their lending rates.
And this is unlikely to be the last rate hike from the central bank as oil and food prices push up inflation. The RBI's survey of households also pointed to a significant rise in households' inflation expectations by 0.90% for a three-month and 1.30% for a one-year period, forcing RBI temper the inflation.
Rajnish Kumar, chairman of State Bank of India (SBI), said, "The lending rates and deposit rates are likely to rise but we have just revised our rates last week so until the asset liability committee (ALCO) meets at the end of this month, there will be no change in our rates... If credit growth improves, certainly the rates will go up both for deposits and loans."
However, Kumar said that home loan borrowers have a one-year reset clause. "So if their rates get revised, then there is a status quo for a year and then, who knows what the rates are then. However, there will be a narrowing of interest rates between the short-term and long-term lending rates."
Keki Mistry, vice chairman and chief executive officer, HDFC Ltd, said, "A part of the rate hike is already passed on. We just raised by 0.10% on June 1, in anticipation of a rate hike by RBI. It will go up further but the timing will depend on the credit demand. Growth outlook remains strong and inflation expectation needs to be more realistic considering the sharp rise in crude oil prices."
The rising oil prices have raised inflation expectations. Annual consumer inflation was 4.58% in April, topping the RBI's medium-term 4% target for the sixth straight month. So the central bank raised its inflation projection for the second-half of fiscal 2018-19 to 4.7% from an earlier projection of 4.4%.
Inflation worries rose after a steep increase in global crude oil and a weakening rupee, and a robust rise in consumer spending as India's economy expanded at 7.7% over the previous year in January-March quarter.
Harsh Roongta, a Sebi-registered investment advisor, said, "Deposit rates have gone up more than the lending rates for a change as most deposit rates were depressed following the demonetization. So there is a bigger uptick in deposit rates. Lending rates have moved up by 0.10% to 0.25% in the last three months. The tone of the credit policy seemed hawkish except for the neutral stance so certainly lending rates are bound to rise."
"Already some banks have raised rates in anticipation. Rates are certainly headed northward. If demand picks up the deposit rates will rise first and also lending rates," said chairman of a large bank who did not want to be quoted.
State Bank of India (SBI), Punjab National Bank (PNB), HDFC and ICICI Bank have already raised their lending rates across various loan tenures on June 1 in anticipation of a rate hike. Bankers indicate the hardening of interest rates will continue as credit growth is gradually picking up.
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Rajnish Kumar, chairman of State Bank of India (SBI), said, "The lending rates and deposit rates are likely to rise but we have just revised our rates last week so until the asset liability committee (ALCO) meets at the end of this month, there will be no change in our rates... If credit growth improves, certainly the rates will go up both for deposits and loans."
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