RBI likely to raise repo rate next week

Punjab National Bank (PNB), ICICI Bank and Housing Development Finance Corporation (HDFC) went for a fresh round of hikes in lending rates on Wednesday. Most lenders had raised rates after the monetary policy committee hiked the repo rate by 40 basis points (bps) on May 4.

PNB raised its marginal cost of funds-based lending rate (MCLR) by 15 bps across tenures and ICICI Bank hiked MCLRs of all tenures by 30 bps. PNB’s one-year MCLR now stands at 7.4%, while ICICI Bank’s one-year MCLR is at 7.55%. HDFC raised its retail prime lending rate by 5 bps. Loans from the mortgage lender will now attract interest rates ranging from 7.05-7.5%, up from 7-7.45% earlier.

Another hike in the repo rate is expected at the MPC meeting next week, which will immediately result in some retail and small business loans turning pricier. External benchmark-linked loans with the repo rate as the benchmark are set to pinch borrowers harder.

Bankers have put on a brave front in the face of the rate hikes, claiming that the growth in the economy will be enough to offset the impact of higher interest rates on customers. State Bank of India chairman Dinesh Khara said in May that hikes should not hurt retail borrowers. “Even if interest rates go up, salaries are also expected to be at pre-Covid levels,” Khara said. As for corporates, the impact on their finance cost may be limited, he added. “If at all there is demand, there is going to be capacity, there is going to be production and there are going to be loans, “ Khara said.

However, analysts are not fully convinced by the argument. In a report on Wednesday, India Ratings said the sensitivity of interest rates over aggregate demand has increased in a meaningful way. “Therefore, a faster and higher transmission of interest rate could become onerous for a section of borrowers. The situation will aggravate if real income does not improve,” the agency said.