Inflation fears led RBI to hike rates

Any hopes of home loans getting cheaper and monthly payback instalments falling were dashed by the quarter per cent hike in interest rates announced by Reserve Bank governor Urjit Patel in his monetary policy statement on Wednesday. It is also expected to slacken the pace of housing development, that recently got a fillip with the government’s affordable housing policy. Banks are likely to further hike borrowing rates for home loans, impacting homebuyers. They are also in a difficult position as their capacity to lend has been reduced by burgeoning non-performing assets. This is a cause of concern as housing is a significant employment provider. Perhaps the Narendra Modi government can look into this as it will affect its poll promise of creating crores of jobs. Banks are in the process of cleaning up their books to enable them to restart lending, though in recent times the fear of adding more NPAs has been a dampner.

Mr Patel seems to have had little choice in raising rates for the first time in over four years. The price of crude oil surged 12 per cent from $66/barrel to $74 since April, and combined with the rise in other global commodity prices, input costs became more expensive. Several emerging markets like Indonesia have raised rates recently. According to estimates, every $10 increase in crude prices pushes up inflation by 30-40 basis points. This was the grouse of merchants in recent months. Added to this is the unquantified effect a hike in minimum support prices for the kharif crop will have on inflation. The MSP is likely to be announced in July. Food inflation has so far been benign, and is expected to continue with projections of a good monsoon.

The governor has, looking ahead, projected high growth and high inflation, which is good and bad news. He projected GDP growth to strengthen to 7.4 per cent year-on-year in 2018-19 (ending March 2019) from 6.6 per cent FY18, and revised the central bank’s CPI inflation forecast upwards to 4.8-4.9 per cent in the first half of 2018-19 from 4.7-5.1 per cent, and 4.7 per cent from 4.4 per cent for the second half. This is not good news for households that work on a strict budget, particularly in the informal sector. They are not protected by higher dearness allowance. CPI inflation rose primarily due to rise in cost of transport, healthcare, education and other services, and the government could step in to ease the situation.

According to one brokerage house, CPI inflation, that affects the common man, reached a 44-month high of 5.9 in April. A weak rupee, which lost over five per cent to the dollar, also added to inflation as it made consumer items costlier. The governor took a neutral stance for the future, but indicated it left his options open. Could it mean another hike is coming in the not too distant future?