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Tuesday, May 17, 2022

‘Rate cycle U-turn: RBI may go for more’

The RBI action is indicative of the fact that there would be more such action taken over time depending on the evolving inflationary situation.

By: ENS Economic Bureau | Mumbai |
May 5, 2022 4:00:14 am
Reserve Bank of India, RBI interest rates, SBI interest rates, interest rates, bank interest rates, Mumbai news, Mumbai city news, Mumbai, Maharashtra, Maharashtra government, India news, Indian Express News Service, Express News Service, Express News, Indian Express India NewsWednesday’s rate hike paves the way for a more aggressive rate hike cycle than earlier expected.

Banks are getting ready for an across the board increase in interest rates as the Reserve Bank of India is likely to hike rates by another 75 basis points in FY23 to tame inflation, bankers and economists said.

“With the current hike of 40 bps in repo rate to 4.40 per cent, it seems the rate cycle has made a U-turn (from the steep cuts seen in early 2020) and the RBI would continue to increase the rates going forward and may reach the pre-pandemic level of 5.15 per cent by end March 2023,” said Soumya Kanti Ghosh, group chief economic adviser, State Bank of India. Bank credit rose (y-o-y) by 11.1 per cent as on April 22, 2022.

Wednesday’s rate hike paves the way for a more aggressive rate hike cycle than earlier expected. “The renewed focus on inflation (and rising inflationary risks) makes a case for a higher terminal policy rate in this rate cycle. We expect three more rate hikes in this fiscal by the RBI now with the repo rate likely to end the year at 5.15 per cent,” said Abheek Barua, chief economist, HDFC Bank.

“Lending rates are expected to go up. However, CASA deposit rates will be affected only marginally,” said an official. Further, if banks raise deposit rates, the cost of funds (CoF) will rise and subsequently, MCLR will too. Ghosh said, “We believe the decision for rate hike will be ultimately good for the banking sector as the risk is getting re-priced properly.”

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The RBI action is indicative of the fact that there would be more such action taken over time depending on the evolving inflationary situation.

“We had expected a 50 bps increase in repo rate in CY2022, but would now believe that there would be a further hike of 50 bps in the year. These twin measures hence affect both the quantum of surplus liquidity in the system as well as the cost of funds,” said Madan Sabnavis, chief economist, Bank of Baroda.

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