Higher interest rates in the offing?

Crude oil prices are flaring up, bringing back the worst fears of higher inflation as well as interest rates that may spoil the party. From $30 per barrel during 2014-15, they are now ruling at about $78 per barrel and threatening to rise further that may affect, though in the medium term, the growth of Indian economy.

The rising petrol and diesel prices are putting immense pressure on the common people, denting their savings.

Inflation has already started to move north and the interest rates too have started their upward journey which may not auger well. The signs of rise in lending rates can be seen through rise in inflation and rise in deposit rates. The retail inflation accelerated to 4.58% from 4.28% during April 2018, an aftermath of rise in crude oil prices, and India’s top public sector bank, SBI, increased its deposit rates with effect from May 28 by 0.25% which took the one to two-year fixed deposit rate from 6.40% to 6.65%. This could lead to increase in the lending rates too in the coming days.

All eyes will now be trained on the RBI – Monetary Policy Committee’s (MPC) bi-monthly announcement scheduled for June 4 to find out if the key policy rates would be hiked or retained with a hawkish stance. If the MPC votes to increase the policy rates the banks and financial institutions would pass on the burden on to borrowers.

The home loan rates have been steady at about 8.35% - 8.50% for a while and it would be interesting to see if the lending institutions would retain the rates or would they resort to increasing in line with the policy announcements.

The road looks rough with rising inflation, rising interest rates and political uncertainty with Lok Sabha elections not far away. Will the MPC bite the bullet or will defer the rise in rates would be anyone’s guess. Over to RBI-MPC for now.