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

Banks are preparing for an throughout the board improve in rates of interest because the Reserve Bank of India is prone to hike charges by one other 75 foundation factors in FY23 to tame inflation, bankers and economists stated.

“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,” stated Soumya Kanti Ghosh, group chief financial adviser, State Bank of India. Bank credit score rose (y-o-y) by 11.1 per cent as on April 22, 2022.

Wednesday’s charge hike paves the best way for a extra aggressive charge hike cycle than earlier anticipated. “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,” stated Abheek Barua, chief economist, HDFC Bank.

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

The RBI motion is indicative of the truth that there could be extra such motion taken over time relying on the evolving inflationary state of affairs.

“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,” stated Madan Sabnavis, chief economist, Bank of Baroda.