Inflation impact: Say goodbye to your dreams of lower EMIs

India's wholesale and retail inflation has inched up to 6.55% and 3.65%, respectively for February 2017. 

Analysts and industry experts believe that with Reserve Bank of India (RBI) already changing its monetary policy stance to 'neutral', chances of an interest rate cut from the bank are low. 

This simply means that your retail bank is unlikely to decrease its interest rates that directly impacts your loan EMIs, including home loan.

Upasna Bhardwaj, Senior Economist of Kotak Mahindra Bank said, “While the core inflation has marginally inched lower, the underlying trend remains sticky thereby further cementing RBI’s concern. We continue to maintain a status quo on RBI’s rate action at least through 1HFY18 amid firm core inflation and global uncertainty.”

Similar views were given by State Bank of India (SBI) and ICICI Bank in their research reports. 

The central bank maintained a status quo in its fifth and sixth monetary policy keeping the repo rate at 6.25% in February this year. 

During demonetisation period, banks trimmed their marginal cost of fund based lending rates (MCLR) which brought down loan EMIs for existing and new borrowers. 

MCLR refers to the minimum interest rate of a bank below which it cannot lend, except in some cases allowed by the RBI. Usually banks revises their lending rates every month. 

Data compiled by RBI in its post demonetisation impact report mentioned that there has been a surge in the current account and saving account (CASA) deposits of banks. The sharp increase of 4.1% points in the share of CASA deposits in aggregate deposits to 39.3% till February 17, 2017 resulted in a reduction in the cost of aggregate deposits.

However, with RBI unlikely to reduce repo rate any further and impact of demonetisation on bank deposits subsiding, the EMIs may not fall any further for quite some time to come. 

Reason behind such steep cut by banks was rising banks deposit. Till December 12, 2016, deposits in the banking system increased by 15% to Rs 1,05,910,00 crore. 

Kavita Chacko – Senior Economist, CARE Ratings, "The revisions in banks MCLR will be contingent on their cost of fund i.e. the interest charged on their deposits. In case there is an increase in liquidity/ deposits, banks could lower their deposit rates."