“With today’s increase in the repo rate, loans linked to repo rate will get repriced, as far as Kotak is concerned, our book is the largest in repo rate benchmark followed by MCLR, so for us to pass on the RBI rate hike is fair and reasonable,” said Uday Kotak, MD, Kotak Mahindra Bank. “In the last few months MCLRs have already started moving up by 5-10 basis points. As the RBI rates get priced into deposit rates you will see MCLR based loans getting repriced.”
Presently, interest rates are at historic lows with home loans starting from 6.5%, car loans from 7% and personal loans from 9%. Bankers say that interest rates could rise as much as 200 basis points, if inflation continues to breach the regulator’s comfort band.
“We feel that repo rate could settle a little more than 6% levels, in that case we are seeing a 200 basis points hike in the next 12-14 months,” said a banker on the condition of anonymity. “We will have to be watchful on interest sensitive sectors to ensure minimal credit slippages if interest rates rise disproportionately.”
Banks in anticipation of an impending rate hike have already been passing on rate hikes to borrowers. State Bank if India, the largest lender had raised its marginal cost of lending rate recently by 10 basis points. One basis point is equivalent to a hundredth of a percentage points.
Bank of Baroda had raised the MCLR by five basis points across tenors while Kotak Mahindra Bank had raised its MCLR by five basis points across all tenors. Banks and non-bank lenders have raised lending rates by up to 15 basis points over the past one month on tightening liquidity conditions and higher deposit costs.
“Looking ahead, given the hawkish rhetoric and high likelihood of an elevated inflation print for April, the RBI will be front-loading further hikes,” said Rahul Bajirao, chief India economist, Barclays. “We expect the RBI to now deliver at least a 50 bps rate hike in the June policy meeting. We see the RBI raising policy rates to 5.15% by August, and expect it will reassess macroeconomic momentum to gauge the need for further hikes beyond that.”