If RBI makes an off-cycle rate hike tomorrow, what will it mean for loan EMIs?



On October 27, RBI announced an additional meeting of the MPC to be scheduled on November 3, 2022.

In the previous policy’s minutes of the meeting, RBI had said the next meeting of MPC was to be held during December 5-7, 2022.

But November 3 meeting was unexpected especially just a day before the FOMC outcome for the November 2022 policy where the majority are expecting another aggressive rate hike by 75 basis points to tame the multi-decadal high inflation of the US.

At the start of this fiscal FY23, we all witnessed a surprise hike of 40 basis points in repo rate on May 4, 2022, which was an unscheduled MPC meet as well. The decision had been called for especially with inflation pressures amidst geopolitical tensions. This was just the beginning of a rate hike cycle and RBI was not alone to do so as many other major central banks like the US Federal Reserve, and European Central Bank.

Since May 2022, RBI has hiked the repo rate by 190 basis points for the fourth consecutive policy. Now the repo rate stands at 5.90%.

Following the rate hikes, banks have also increased their lending rates. As per RBI’s latest data, the weighted average lending rate (WALR) on fresh rupee loans of SCBs increased by 26 basis points (bps) from 8.33% in August 2022 to 8.59% in September 2022.

Further, the 1-Year median Marginal Cost of Fund based Lending Rate (MCLR) of SCBs increased from 7.75% in September 2022 to 7.90% in October 2022.

Why is there a possibility of a rate hike from the November 3 meeting?

Firstly, the majority of experts have factored in rate hike trends till December 2022-end as inflation continues to be elevated and is expected to slow down from the next fiscal.

In September 2022 (the latest print), India’s inflation reached to 5-month high of 7.41% due to soaring food prices. Inflation continues to be at a multi-year high. The consumer price index (CPI) has also stayed above RBI’s upper tolerance limit of 6% for the ninth consecutive month.

During the previous policy (September 2022), RBI projected CPI inflation to be at 6.7% by FY23-end. The inflation is seen at 6.5% in Q3, while 5.8% in Q4 of FY23. For the first quarter of FY23, the inflation is seen at 5%.

RBI’s monetary policy decisions align with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2% while supporting growth.

The inflation continues to be under pressure, and markets remain volatile, while the rupee weakens against the US dollar with forex reserves declining. On the other hand, ‘recession’ fears in major economies like the US and Europe stay in the loop, coupled with geopolitical tension, supply-chain disruption, and energy crises are some of the other factors that have put global economic growth prospects blurry.

For the November 3 meeting of RBI, Rahul Chander, MD & CEO of LivFin said, “The Reserve Bank of India’s Monetary Policy Committee’s unscheduled meeting this week is unlikely to spring a surprise with an off-cycle rate hike, even though it comes a day after the Federal Reserve’s policy decision and as unseasonal rains that have damaged crops intensify the inflationary pressure on the Indian economy.”

According to Chander, MPC has gone for a cumulative 190 basis points of a key policy rate hike since May, taking the repo rate to pre-Covid levels. The encouraging employment numbers, showing growth at the fastest pace in three years on the back of strong factory output, is another factor that will affect any decision of the RBI in increasing rates at this time.

“If the MPC goes for another round of rate hike, it will add to the concerns of NBFCs as they struggle to maintain profitability in an already challenging economic environment, as frequent increases in interest rates not only dents the number of loan takers but carries a serious risk of default from existing borrowers,” Chander added.

Further, Chander added, “for an NBFC the measurement of profit is the difference between the cost of borrowing, which essentially implies that these institutions have to raise funds to lend it to consumers, and the cost of credit, which means additional charges on loans.”

Both banks and NBFCs have hiked their benchmark lending rates since May this year significantly to pass on the upside in borrowing cost of funds which usually goes up in a rate hike scenario.

Last week, Dr. Joseph Thomas, Head of Research, Emkay Wealth Management said, “The special additional meeting of the MPC convened by the RBI for Nov.3, 2002, and the possibility of further rate hikes given the persistent inflation is something that market is pondering over with caution at this juncture. We may continue to see some volatility in the markets as we cruise into the new week.”

The outcome of RBI’s meeting will play a major role in swaying market sentiment in the coming days.

On November 2, RBI governor Shaktikanta Das in an Annual FIBAC 2022 conference said that the current global economy is sailing in extremely turbulent waters. Despite humungous challenges, the Indian economy has progressed relatively well.

Das added, “I would like to impress upon the banks and businesses to remain focussed on reinforcing their resilience while continuing to grow and meet market demand. They should continuously assess the risk buildup, if any, sharpen governance and strive to maintain healthy levels of capital and other buffers. So far as the RBI is concerned, we remain committed to support and preserve macroeconomic and financial stability. Once again, it is a moment of ‘whatever it takes’.”

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