HDFC Bank becomes the first to raise rates despite the central bank holding rates, others lenders to follow
Your equated monthly installments (EMIs) are likely to go up despite the Reserve Bank of India (RBI) holding on to the rates at which it lends to banks.
On Wednesday, the largest private sector lender HDFC Bank was the first to raise lending rates by 0.10%. The one-year lending rate of the bank is now pegged at 8.20%. Many believe that others would follow suit.
The Monetary Policy Committee (MPC) of RBI decided to hold interest rates at 6% for the third consecutive policy meet despite the retail inflation gaining momentum.
Higher credit growth, slower deposit growth coupled with the central bank's plans to link the two lending rates – the base rate and the marginal cost-based lending rate (MCLR) – will lead to higher cost of borrowing for both retail and corporate customers.
Starting April 2018, RBI will link the earlier floor price for loans, the base rate, and the present floor price MCLR. With the introduction of the MCLR system, it was expected that the existing base rate linked loans and other credit exposures would also migrate to MCLR system. However, this has not happened, which saw banks lowering the MCLR, while the base rates were kept static.
RBI deputy governor N S Vishwanathan said, "We have been mentioning in the earlier policy that we are concerned about the inadequacy of monetary transmission to the base rate and about large number of accounts still being under the base rate regime."
He said, "We are now harmonising the calculation of base rate with the MCLR so that the responsiveness of the credit portfolio to monetary policy signals is not hindered by interest rate on large part of bank portfolio being linked to the base rate. I want to again clarify that what we are doing is harmonising and we are not equalising the MCLR with base rate."
While the impact of this on customers is not yet clear, but since credit growth has started picking up and the deposit growth trailing the credit growth it is but expected that the banks would hike lending rates and protect their margins, especially at a time when a pile of bad loans are eating into their profits.
"It is observed, however, that a large proportion of bank loans continue to be linked to the base rate despite the Reserve Bank highlighting this concern in earlier monetary policy statements. Since MCLR is more sensitive to policy rate signals, it has been decided to harmonise the methodology of determining benchmark rates by linking the base rate to the MCLR with effect from April 1, 2018," said an RBI press release.
Praveen Kumar Gupta, managing director, State Bank of India, said, "They have talked of harmonising the two rates so it would mean that it would move in tandem. What impact this would have on the lending rates needs to be monitored."
Some bankers said if the credit growth is much higher than the deposit growth, banks will have to increase rates.
Dinabandhu Mohapatra, managing director and CEO, Bank of India, said, "A high CD ratio may force banks to increase rates. But base rates will come down once the MCLR is harmonised with it. But will it result in lower lending rates needs to be seen in the context of the credit growth in the system and also the deposit growth."
Credit growth continued to remain in double-digits, clocking 10.58% at Rs 81,71,399 crore in the fortnight to January 19,2018, Deposits grew 5.10 % in the fortnight to January 19, 2018, at Rs 1,09,77,980 crore.
Monetary Policy Highlights
- Key lending rate (repo) unchanged at 6%
- Reverse repo rate remains at 5.75% and marginal standing facility (MSF) rate and Bank Rate at 6.25%; Monetary policy’s stance neutral
- Petrol and diesel prices rose sharply in Jan, reflecting lagged pass-through of past increases in global crude prices
- Retail inflation estimated at 5.1% in Q4 this fiscal and 5.1-5.6% in H1 of FY2018-19
- Inflation likely to ease to 4.5-4.6% in H2 of FY19
- Gross Value Added (GVA) growth for FY18 seen at 6.6%
- GVA growth for 2018-19 projected at 7.2%
- GST stabilising, which augurs well for economic activity
- Early signs of revival in investment activity
- RBI seeks pick-up in credit growth due to recapitalisation of PSBs and resolution proceedings under IBC
- Export growth expected to improve further on account of improving global demand
- RBI says focus of Union Budget on rural and infrastructure sectors a welcome development
- Five members voted in favour of status quo in interest rate; one member voted for an increase of 0.25%
- Next meeting of the MPC on April 4 and 5
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 "Urjit Patel-AFP")
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Higher credit growth, slower deposit growth coupled with the central bank's plans to link the two lending rates – the base rate and the marginal cost-based lending rate (MCLR) – will lead to higher cost of borrowing for both retail and corporate customers.
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