Why home and retail loans will remain costly in FY24

It was widely expected that the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) would continue to keep the key interest rates unchanged in its latest monetary policy review. And it did so on August 10. For the third consecutive time, the MPC kept the repo rate (the rate at which Indian commercial banks borrow from the central bank) at 6.5 per cent. With experts saying the RBI was likely to maintain a “hawkish” stance and desist from cutting interest rates for the rest of the financial year, it may be a long wait for consumers hoping for lower interest rates on home and other retail loans.

Lower consumption would inevitably lead to lower investment from the private sector. That won’t be good news for an economy that needs to grow beyond the widely projected 6-6.5 per cent if it has to create enough jobs for the millions who enter the employment market each year. The MPC voted, with a 5-1 majority, to keep the ‘withdrawal of accommodation’ stance unchanged. Withdrawal of accommodation means reducing money supply in the system, which will help rein in inflation.

The RBI had started an interest rate hike cycle in May 2022 to control inflation, after keeping interest rates low throughout the pandemic to support growth. The rate cycle hike saw a total of 2.5 per cent (250 basis points) increase in repo rates, making loans costlier for consumers and industry. When the RBI held on to rates in April this year, governor Shaktikanta Das had said that it was just a ‘pause and not a pivot’. It indicated the central bank could review and go for a rate hike in case the circumstances changed, especially in light of the Ukraine war that has driven uncertainty and inflation in global economies.

The reason for the RBI holding on to rates, without lowering it, is quite clear. After the June monetary policy review, consumer price inflation or retail inflation began rebounding. It rose to 4.8 per cent year on year in June after falling in the preceding four months. ”While it has been within the MPC’s target range of 2 to 6 per cent so far, recent data points to it crossing the upper bound July-August,” ratings firm Crisil said in a note on August 10.

“Fresh risks are from food as major vegetables, such as tomatoes, have seen prices rise almost four times month on month in July. To be sure, vegetables are the most volatile component of inflation. But other food items, such as cereals, milk and spices have also seen elevated inflation since the start of this year,” the Crisil note added.

However, the non-food component of consumer price inflation continues to ease, driven by falling commodity prices. Easing input costs have reduced pressure on manufacturers to hike retail prices. ”The MPC recognises the growing uncertainties to the inflation outlook. While it expects the vegetable price spike to be transitory, it is concerned about the impact of weather and global factors. El Niño and other weather events could impact food output. Geopolitical tensions present a fresh risk to global food prices. Even the recent rise in crude oil prices needs to be monitored,” Crisil said, adding that it expected the MPC to hold on to policy rates in the next meeting while awaiting a clearer picture on inflation. ”A 25 basis points rate cut in early 2024 is a conditional possibility for now,” the note said.

Food prices will continue to drive inflation. According to a note from CareEdge Ratings, the prices of tomato rose 385.2 per cent since the last policy meet in June, onion 24 per cent, potato 15 per cent and tur daal 10.3 per cent. Rice prices, meanwhile, rose 5 per cent. “Given that food contributes approximately 45 per cent to the CPI basket, the overall inflation outlook has deteriorated compared to the preceding MPC meeting,” it said. Consequently, the RBI has revised its inflation projection for FY24 to 5.4 per cent from 5.1 per cent, with a substantial revision of 100 basis points in the second quarter and 30 basis points in the third quarter of the fiscal year, the CareEdge Ratings note added.

CareEdge Ratings also believes the RBI is preparing for an extended pause, accompanied by a hawkish stance. This has pushed the likelihood of a rate cut to the next financial year. A note from Bank of Baroda also said it did not expect any repo rate cut in the current financial year. On the other hand, a rate hike too cannot be ruled out if inflation surges past 6 per cent on a continuous basis, it said.

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