Reserve Bank of India Governor Urjit Patel has ruled out any further interest rate reductions going forward.
This means any loan borrower’s equated monthly instalments (EMIs) may not come down anytime soon. On the other hand, it is a chance to park more cash into the banks from here on.
The six-member monetary policy committee (MPC) on October 5 shifted its policy stance to 'calibrated tightening' from previously 'neutral', while maintaining a status quo in the key policy repo rate.
Repo or repurchase rate, which is the rate at which banks borrow from RBI for short-term funding requirements, remains at 6.50 percent.
A few hours after RBI’s announcement, country’s biggest lender State Bank of India (SBI) hiked its marginal cost based lending rate (MCLR) by 5 basis points (0.05 percentage points) across maturities up to three years. SBI, being the leader, will soon be followed by other lenders. SBI’s one-year MCLR stands at 8.50 percent, which is typically the rate charged for home and auto loans.
The last hike in MCLR by SBI was 0.20 percentage points in September this year. Prior to that, the lending rate increases were announced in June and March this year.
Reasoning the status-quo decision, he said: "Please recall, that we had two rate hikes in the space of two months (June 7 and August 2 monetary policy announcements) and today's stance of calibrated tightening essentially means that in this rate cycle, rate cut is off the table and we are not bound to increase rates at every meeting because that is not required given our inflation outlook and forecast at this point of time."
As new data comes in, we would look into changing our policies accordingly. Calibrated tightening is an appropriate stance given the forecasts and financial conditions, he added.
Even before the MPC raised the policy rate in June 2018, banks had been increasing their term deposit rates from December 2017 in response to the waning of surplus liquidity in the system.
Savings and current account deposits also reduced in banks which led to pressure on higher cost of funding.
"Of the various tenors, the transmission of the policy rate hikes in June and August was the highest to lending rates of one-year tenor, with foreign banks in the lead," said the monetary policy report released by RBI after the policy announcement.
In the post-policy press conference, Patel said the decade-long accommodation by central banks globally is tapering off and emerging markets are facing headwinds from rising crude oil prices.
MPC has been given a legislative mandate to manage an accepted inflation target, which stands at 4.00 percent (+/- 2.00 percent).
The RBI chief noted that global trade was losing pace probably because the ongoing trade war. He said MPC felt global headwinds pose huge risks to the growth and inflation outlook.
According to Patel, it is imperative to further strengthen the domestic macroeconomic fundamentals and although the outlook for food inflation is benign, uncertainty around the impact of minimum support price (MSP) and fiscal slippage, if any, could impact inflation adversely.
This, along with the change in policy stance, has invariably ruled out any breather in your home, auto or any other loans taken.
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