RBI hikes lending rate, loans likely to become dearer

The Bank's Monetary Policy Committee had been expected to raise interest rates in May, but held fire because the economy went through a weak patch at the start of the year - partly because of the harsh weather conditions, dubbed the Beast from the East.

Among the Monetary Policy Committee panel members, Dr Chetan Ghate, Dr Pami Dua, Dr Michael Debabrata Patra, Dr Viral V Acharya and Dr Urjit R Patel voted in favour of the decision while Dr. Ravindra H Dholakia voted against the decision.

But he also said the Bank may have taken an "unnecessary risk", saying: "Recent inflation data has been softer than expected and United Kingdom wage growth continues to remain subdued, suggesting that the United Kingdom economy may not be in as rude health as the BoE would like us to believe".

The one reason that may have prompted the RBI to hike interest rates is the core inflation, which has been on a upsurge.

RBI had increased rate by 25 bps in the previous policy review after four-and-a-half years.

The move will make the home loans dearer and will have direct impact on the borrowers as the rate hike will lead to banks raising their interest rates in loans.

We think this decision will score well with domestic investors as well as reemphasise the inflation fighting credentials of the central bank in the eyes of the worldwide community. "First, the central government has made a decision to fix the minimum support prices (MSPs) of at least 150 per cent of the cost of production for all kharif crops for the sowing season of 2018-19", RBI said adding that this increase in MSPs for kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and second round effects on headline inflation.

But he predicts a quarter point rise every six months until rates reach 1.5% in 2020.

While crude oil prices have come off the three year high, they continue to be volatile threatening inflation and current account deficit.

Traders said though the market was largely prepared for a rate hike on Wednesday, yields would still shoot up by 5-10 basis points after one, and the surge would be much more if the RBI also tightens its stance.

"Global rates are hardening, especially in the USA", he added. GDP growth is expected to rise to 1.8 per cent in 2019, above the 1.7 per cent expected in May.

Policy stance would remain "neutral".

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