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No RBI signal, but lenders kick-off rate hikes in India

Even as the Bank of England hiked the interest rates by 15 basis points to 0.25 per cent and the US Federal Reserve decided to accelerate tapering of bond purchases ahead of a rate hike,

Written by George Mathew | Mumbai |
December 18, 2021 4:30:52 am
A hike in fixed deposit rates was announced by Bajaj Finance earlier this month — by 0.30 per cent for tenors between 24 and 60 months on fixed deposits (FDs) of up to Rs 5 crore.

Although the Reserve Bank of India (RBI) is yet to jack up key policy rates, interest rates are slowly showing signs of rising in the financial system, in line with the global trend. At a time when global central banks are scheduled to tighten their monetary policies and hike rates, Indian banks and financial entities have started announcing rate hikes.

Even as the Bank of England hiked the interest rates by 15 basis points to 0.25 per cent and the US Federal Reserve decided to accelerate tapering of bond purchases ahead of a rate hike,

State Bank of India (SBI) has raised the benchmark lending rate, or base rate, by 10 bps without waiting for the RBI to hike the repo rate or reverse repo rate. SBI’s revised base rate is 7.55 per cent. Base rate is the minimum interest rate at which a bank could lend to its customers under the base rate regime.
This means the overall interest rate of old borrowers with floating rate loans like home loans linked to the base rate will go up. Home loan customer will have to shell out higher equated monthly instalments (EMIs) or they will have to extend their loan tenure.

A hike in fixed deposit rates was announced by Bajaj Finance earlier this month — by 0.30 per cent for tenors between 24 and 60 months on fixed deposits (FDs) of up to Rs 5 crore. HDFC Bank too raised FD rates for select tenors with effect from December 1. On FDs maturing in one year and two years, HDFC Bank has hiked interest rates by ten basis points to 5 per cent. On one-year FDs, it is offering 4.9 per cent. The bank is now offering a 2.50 per cent interest rate on deposits with a maturity of 7 to 29 days, and 3 per cent interest rate on FDs with a maturity of 30 to 90 days, 3.5 per cent for FDs with maturity of 91 days to 6 months and 4.4 per cent for FDs with 6 months 1 day to less than one year tenor.

Explained

policymakers in some parts of the globe are tightening monetary policy. The RBI, however, is yet to begin policy normalisation. Its decision may be contingent on the impact of Omicron on economic activity.

Ujjivan Small Finance Bank hiked interest rate on term deposits with a tenure of 19 months and one day to 24 months to 6.6 per cent. For 12 months tenure, it has hiked interest rates to 6.5 per cent from 6 per cent. Other banks are also set to increase interest rates in the coming days.

According to a Morgan Stanley report, the February policy (2022) will likely mark the start of policy normalisation with a reverse repo rate hike to normalise the policy rate corridor. “However, we anticipate the lift-off and its quantum to be contingent on the impact of Omicron on economic activity. If the growth momentum remains durable, we would then expect that the RBI could choose to hike the reverse repo rate 40 bps to adjust the policy rate corridor in one shot. Next, we expect this to be followed by a hike in the repo rate in the April, with a cumulative rise of 150 bps in FY2023,” it said.

On December 8, the Monetary Policy Committee of the RBI kept the policy rate unchanged for the ninth time in a row and retained its accommodative stance to support the recovery in the economy, which is yet to fully reach pre-pandemic levels. All members of the MPC voted to keep the repo rate — the key policy rate of RBI or the rate at which it lends to banks — unchanged at 4 per cent while one member, Jayanth Varma, dissented against retaining the accommodative policy stance.

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