Home loans will become costlier after the Reserve Bank of India raised the benchmark repo rate by 25 basis points (bps) to 6.50% on Wednesday, but it maintained a neutral policy stance as it seeks to rein in inflation and boost the weak rupee.

The move follows the central bank’s surprise 25 bps rate hike in June amid increasing worries about rising crude oil prices and a weakening rupee (one basis point equal to one hundredth of a percentage). This is the first time since October 2013 that the rate has been raised twice in a row.

Speaking at a press conference in Mumbai on Wednesday, RBI governor Urjit Patel mentioned that the monetary policy committee took note of the rise in consumer price inflation for the third consecutive month in June. “Even though food inflation remained muted, other components recorded moderate to sharp price increases,” he said, adding that high volatility in crude oil prices, financial turbulence in global markets and input pressures faced by corporations domestically were among the other risks to the RBI’s outlook.

Inflation has been increasing this year and at 5% in June remains higher than the RBI’s medium-term target of 4%. And it looks unlikely to subside in the second half of the year as higher global crude oil prices have pushed up fuel prices in India. RBI has raised its inflation projection from 4.7% to 4.8% for the second half of FY19 and added that it sees retail inflation at 5% in the first quarter of FY20.

The GDP forecast for FY19 has been retained at 7.4%, while growth in Q1 FY20 has been projected at 7.5%. Commenting on the minimum support price (MSP) hike for kharif crops, Patel said, “There is considerable uncertainty around full impact of MSP hike impact on inflation which will only become clearer over the next several months when the schemes are rolled out across commodities.” RBI deputy governor Viral Acharya said that a part of the increase in MSP was already factored into the inflation projections given two months ago.

On the fiscal deficit front and its impact on the RBI’s outlook, Patel said, “Any fiscal slippage on the centre’s end or state levels could have adverse implications on the inflation outlook and could crowd out private investment going forward.”

However, the RBI governor maintained that investment activity remained robust, and a pickup in foreign direct investment amid buoyant domestic capital market conditions bodes well for growth.

In light of rising concerns over rising protectionist rhetoric from the U.S., Patel said rising trade protectionism, geopolitical tensions and elevated oil prices pose grave risks to near-term and long-term global growth prospects. “Trade skirmishes evolved into tariff wars and now we are possibly at the beginning of currency wars, given this we have to ensure that we run a tight ship on the risks that we control to maximise chances of ensuring macroeconomic stability and continuing with a growth profile of 7-7.5% going forward,” he added.

Among other important announcements made by RBI was the introduction of a co-origination model with shared risk between banks and non-banking financial institutions for loans to priority sector borrowers to help priority sector beneficiaries with a lower cost of credit.

RBI also said that a review of the internal ombudsman mechanism in banks was undertaken and the scheme will now be extended to all scheduled commercial banks in order to help them address customer complaints and grievances efficiently.

When asked about the governance issues currently plaguing ICICI Bank, which is considered “too big to fail”, RBI officials refused to comment on a specific bank. However, the central bank’s officials said that they are dealing with such situations as they are emerging and will follow global standards and principles with respect to handling problems at banks that are “too big to fail”.

Meanwhile, even though India Inc expected the repo rate hike, it expressed hope that the interest rate regime stabilises going forward.

“Given the evolving inflation situation, the increase in the repo rate today by the RBI was expected. By frontloading the interest rate hikes, the RBI is looking at minimising the adverse impact of rising inflation on the economy as well as providing support to the rupee. We hope that following this increase there will be stabilisation in the interest rate regime,” said Rashesh Shah, president of industry body Federation of Indian Chambers of Commerce and Industry.

Shah added, “As real interest rates in India continue to be on the higher side vis-a-vis some of our global counterparts, impacting the country’s competitiveness, especially that of small and medium enterprises, we hope that the central bank would give greater attention to growth in the medium to long term.”

Rana Kapoor, managing director and chief executive officer of Yes Bank said that the rate hike was a rational response to the recent acceleration in inflation. “However, with peak CPI [consumer price index] inflation now behind us and monetary transmission playing out gradually hereon, I expect a pause in the remainder of FY19 [fiscal year 2018-19],” he added.

Kapoor’s expectations of a pause in the rate hike cycle was shared by other experts. SBI Mutual Fund’s chief investment officer Navneet Munot said he expects the central bank to pause the rate hike cycle for the next two meetings and only resume the increases, if any, only next year after reading the trends in global commodities, fiscal and minimum support price evolves.

While the direct impact of the rate hike could be on the real-estate sector, sentiments were mixed. Surendra Hiranandani, chairman and managing director, House of Hiranandani said, “The hike will certainly impact credit growth and further delay the revival of the real estate sector. Construction activity had started to pick up slowly post the implementation of policy reforms, but the rise will hurt consumer sentiment.”

However, Anuj Puri, chairman of ANAROCK Property Consultants said, “While this [RBI’s repo rate hike] may lead to a hike in home loan rates as well, the overall real estate sector now rests on a strong footing and buying decisions may not be altered by these marginal changes.”

Puri’s thesis is based on the fact that there are several lucrative deals in the real-estate market and demand from end-users is back. According to him, a marginal hike in home loan rates are unlikely to deter buyers.

Urijit Patel

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