EMIs to cost more as RBI raises lending rates, India Inc disappointed

EMIs on home, car and two-wheeler loans are set to cost more as the Reserve Bank of India (RBI) on Wednesday raised key lending rates on the back of higher inflationary risks and fears of global volatility such as currency wars.

Consequently, the rate hike affected in the third monetary policy review for 2018-19 is expected to dampen the industrial output scenario. However, the pre-festive season demand might mitigate the impact. 

On its part, India Inc though disappointed with the 5:1 decision of the RBI monetary policy committee (MPC) for a hike was not surprised but hoped for a more accommodative stand in the future. 

Accordingly, the RBI hiked the key repo or short-term lending rate by 25 basis points to 6.50 per cent, while the reverse repo rate was adjusted to 6.25 per cent and the bank rate to 6.75 per cent.

Addressing the media after the rate hike decision, RBI Governor Urjit Patel said the MPC noted the rise in retail inflation has continued for the third consecutive month. 

It touched the 5 per cent mark in June compared to 4.87 per cent in May and has gone beyond the RBI`s revised inflation projection of 4.8-4.9 per cent for the first half of the current fiscal.

Noting the government`s decision to raise minimum support prices (MSPs) by at least 150 per cent of the cost of production for all kharif crops, RBI said this is much higher than the average increase seen in the past few years.

"(This) will have a direct impact on food inflation and second round effects on headline inflation," the statement said. 

The RBI maintained its inflation projection of 4.8 per cent for the second half of

2018-19 and said it would touch 5.0 per cent in the first quarter of the next fiscal (2019-20). 

"Uncertainty around domestic inflation needs to be carefully monitored in the coming months," Patel said.

The Governor also pointed out the high volatility in global crude oil prices and said any fiscal slippage by the Central and state governments would impact the inflation outlook.

According to Patel, rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity. 

"Geopolitical tensions and elevated oil prices continue to be the other sources of risk to global growth," he added.

The rate hike decision subdued the two key indices -- NSE Nifty50 and the S&P BSE Sensex -- and broke their week-long rally, with the wider Nifty50 settling at 11,346.20 points, lower by 10.30 or 0.09 per cent and the barometer closing the day`s trade at 37,521.62 points, lower by 84.96 points or 0.23 per cent.

Commenting on the repo rate hike, Ficci President Rashesh Shah said: "Given the evolving inflation situation, the increase in the repo rate today by RBI was expected."

"By front-loading the interest rate hikes, the RBI is looking at minimising the adverse impact of rising inflation on the economy as well as providing support to the rupee."

Shah hoped the interest rate regime would stabilise following this increase. 

"Moreover, it is very important for the Government and the RBI to work in tandem to rein in the inflationary pressures which are largely emanating from the supply side," Shah said.

Assocham President Sandeep Jajodia said: "We move towards a festive season, which should be helping the growth further and not remain subdued because of rising interest rates."

"The banks have already started raising rates. As the country moves into the general election mode, the balance between the inflation and growth should be evenly balanced and not tilted in favour of containing inflation at the cost of economic expansion".