MUMBAI: Loans are set to get costlier for individual and business borrowers in the coming months with the Reserve Bank of India’s monetary policy committee voting in favour of a 25-basis-point rate hike (100bps=1%). The
RBI on Wednesday raised its repo rate to 6.5% — the second increase in two months after consumer inflation remained stubbornly above 4% — the target mandated by the government.
This is the first time that the six-member MPC, since its constitution in 2016, has voted for hiking rates in two successive meetings. While the trigger for RBI’s rate action is clearly inflation, the policy statement has been very positive on the economic front. The increase in rates could raise cost of borrowings for banks who in turn will increase their marginal cost of lending rate, which is reviewed every month. The RBI has projected inflation at 4.8% in the second half of fiscal year 2019 and 5% in the first quarter of fiscal year 2020.
The central bank has also retained a GDP growth forecast of 7.3-7.4% for the second half of FY19 and 7.5% for the first quarter of FY20.
Various economic indicators suggest that economic activity has continued to be strong. The progress of the monsoon so far and a sharper-than-usual increase in minimum support price of kharif crops are expected to boost rural demand,” said RBI governor Urjit Patel. He added that non-food credit has risen 13% this fiscal, investment activity remains firm and the output gap has almost vanished.
While sounding a caution on oil prices, Patel said that foreign direct investment inflows have improved even as portfolio outflows have slowed. “With peak of CPI inflation now behind us, and monetary transmission playing out gradually hereon, I expect a pause in the remainder of FY19. I foresee the RBI re-focusing on the growth-inflation mix, as the cumulative impact of a 50bps rate hike is assessed,” said Rana Kapoor, MD & CEO of Yes Bank.
In the post-currency interaction, RBI deputy governor Viral Acharya warned that currency in circulation was rising, and could reduce liquidity in the banking system. “Though the growth in currency-in-circulation has moderated to some extent recently, its expansion remains above the historical trend... reserve money growth is expected to pick up in the second half of FY18. It usually coincides with the start of the festive season,” said Acharya. Many in the market saw the rate hike as “frontloading” of an action that was seen as inevitable.
