MAY 2-MAY 8

RBI’s course correction and industry reactions

• RBI surprises with an off-cycle rate hike

In a surprising move, the monetary policy committee (MPC) on 4th May, 2022, Wednesday, unanimously voted to raise the policy repo rate by 40 bps from 4% to 4.40% with immediate effect –  a clear indication that inflation may be spiraling into higher levels than anticipated. Synchronised shocks of commodity prices, supply chain disruptions and higher inflation unleashed by the Russia-Ukraine war have shifted the future trajectory of inflation upwards. 

• Industry reactions

-BFSI

“Retail loans for most banks including us are linked to the repo now as the external benchmark. So while we have not taken a call now and our asset liability committee will meet shortly to take a call, we have seen some banks already hiking these rates. It is a natural thing that the pass through will happen and so those rates will go up and therefore the EMIs will also go up,” says Ashwini Kumar Tewari, MD, State Bank of India.

Rajkiran Rai G, MD & CEO of Union Bank of India, said: “This rate hike was expected, but the timing is a bit surprising. We have a lot of repo rate (external benchmark rate)-linked loans. So, all those loans will be repriced now. The deposit cost for a bank goes up when the liquidity in the system goes down. Now, with the liquidity going out of the system, banks will start increasing the deposit rates.”

“We believe that the lending rates may go up gradually, and since there is enough liquidity in the system, our borrowing cost may go up only gradually. Most of the borrowing for us is fixed in nature and hence the rate hike will not have an immediate impact on borrowing cost,” said Umesh Revankar, Vice Chairman and MD, Shriram Transport Finance.

George Alexander Muthoot, MD, Muthoot Finance, said there is adequate liquidity for productive requirements of the economy and as such borrowing cost in the system may go up at a gradual pace. “We believe this is surely the beginning of the RBI rate hike cycle, although in a calibrated manner to respond to the evolving growth-inflation situation,” he said.

Raman Aggarwal , director and spokesperson at the NBFC association Finance Industry Development Council (FIDC) said “The actual impact on NBFCs will primarily be driven by the increase in borrowing costs from banks and other financial institutions. Further, considering the fact that majority of  retail borrowings of NBFCs are at fixed rates and there is still ample liquidity in the system, whatever increase seen on the ground may not have significant impact on demand”

-Real Estate

Vikas Wadhawan, Group CFO, Housing. com, PropTiger.com and Makaan. com, said the real estate industry is well positioned to manage any hike and was quite frankly expecting it as well to tackle the tight inflation.

Gulam Zia, Senior Executive Director, Knight Frank India, said the policy rate hike will translate into higher EMIs for home loans. “However, we believe that improved homebuyer’s attitude, preference for owning a house and strong wage growth will continue to support the housing market.”

Amit Goyal, CEO, India Sotheby’s International Realty, said this signals an end to the historical-low interest rates regime, as lending institutions will soon follow with an increase in rates on deposits and loans.

-FMCG

“Looking ahead, the near-term operating environment will remain challenging. We expect to see more sequential inflation. Growth will be predominantly price-led. We will continue to drive savings harder and take calibrated pricing actions whilst ensuring we protect and grow our consumer franchise…. Our margins will decline in the short term as price versus cost gap increases” HUL CFO Ritesh Tiwari said in an earnings call for the March quarter and financial year 2022.

-Infrastructure

Hemant Kumar Ruia, CFO at DP World. said with this 40 bps hike in the interest rates in the off-cycle plus the  increase in CRR, the RBI finally seems to be coming to terms with the current set of inflationary pressures which are driven by higher fuel and food prices.” 

-Consulting  

“We expected a hike in June. The surprise move by the RBI to raise the policy rates a month earlier suggests that it does not want to wait and watch but act quickly before inflation derails the growth recovery,” said Rumki Majumdar, Economist, Deloitte India.

-Industry bodies

Pradeep Multani, President, PHD Chamber of Commerce and Industry, said “The economy is still recovering from the pandemic impact of coronavirus, yet there are worries from geo-political developments, such as likely contagious impact on trade and finance…though the RBI’s step is aimed at addressing the inflationary pressure, hike in the repo rate and CRR will hurt the consumer and business sentiments.”

CREDAI’s President Harsh Vardhan Patodia, said, “The low repo rates had given a boost to the real estate sector during the course of the pandemic. Raising the repo rate by the RBI is a surprise for the real estate industry given the inflationary trends.” “We are witnessing trends of growth momentum in the realty sector and developers have largely stayed resilient in the midst of challenges from the pandemic. Though this escalation will impact the buying power of consumers, we feel the impact will be taken in stride by the home buyers.”

• Way forward

Many experts believe that the RBI may continue to raise rates up to 5.15% which was the pre-pandemic mark over the course of the next 6-9 months or by March 2023. The challenge for India could arise on the consumption side since home loans and personal loans will become expensive. Nomura expects retail inflation to remain at 6.6% year-on-year in the fiscal year that began in April and has raised its forecast for the main interest rate to 5.75% by December from its earlier projection of 5%, and to 6.25% by the second quarter of 2023, up from a previous 6%.