Should Borrowers Worry About SBI’s Rate Hike?

The State Bank of India (SBI) increased its base rates by 10 basis points to 7.55 per cent recently.

One basis point equals a hundredth of a per cent. Further, the bank implemented a 10 basis point increase for the rates on deposits above Rs 2 crore.

HDFC Bank and ICICI Bank have increased their deposit rates as well. Previously, two of India’s largest non-banking finance companies (NBFCs) HDFC Limited and Bajaj Finance have increased their deposit rates as well.

However, SBI’s loans are majorly linked to the Marginal Cost of Lending Rate, which reflects the marginal cost of funds. Unlike the MCLR, the base rate reflects the average cost of funds.

Under the Reserve Bank of India’s regulations, no bank should lend below the MCLR unless permitted to do so. The MCLR is used as a benchmark rate, and has some advantages over the base rate system.

It was introduced in April 2016, and has since been applied for most domestic rupee loans. In addition, the MCLR rates are more sensitive to changes in monetary policy as compared to base rates.

As a result, currently, base rates contribute to only 2.5 per cent of SBI’s loans.

However, the bond markets are expecting an increase in lending rates in the future. Yields have risen globally recently as traders expect an interest rate hike by the central banks as the economy picks up pace.

For India, the yields for 10-year bonds that mature in 2031 have risen by 27 basis points from 6.1 per cent around July 2021 to 6.37 per cent currently.

Interest rates all over the globe saw a decline as central banks cut interest rates to support the economy. India was no exception, the RBI highlighted in a report, adding that India has a large liquidity surplus.

“Liquidity conditions remained in large surplus, with daily absorptions through the fixed rate reverse repo and the variable rate reverse repo (VRRR) operations under the liquidity adjustment facility (LAF) averaging ₹8.6 lakh crore in October-November. Reserve money expanded by 7.9 per cent (year-on-year) on December 3, 2021. Money supply (M3) and bank credit by commercial banks grew year-on-year by 9.5 per cent and 7.0 per cent respectively, as on November 19, 2021,” said the report.

However, slowly, the focus has been moving away from boosting growth to focusing on inflation that has been increasing of late. As growth returns in economies and inflation rises, banks are likely to grow more conservative.

"The economy no longer needs increasing amounts of policy support," United States Federal Reserve Chairman Jerome Powell said in a news conference. He further added that corporate and consumer spending would remain strong and hence, would not require an interest rate increase.

While the markets and experts believe that interest rates will rise, the RBI has not budged from its accommodative stance. A week back, the central bank had refused to change its accommodating stance and allowed the low rate regime to continue. According to the RBI’s documents the economy should become self-sustaining, and the recovery should have a broader base.

“The MPC (Monetary Policy Committee) has judged that the ongoing domestic recovery needs sustained policy support to make it more broad-based. Considering it appropriate to wait for growth signals to become solidly entrenched while remaining watchful on inflation dynamics, the MPC decided to keep the policy repo rate unchanged at 4 per cent and to continue with an accommodative stance as long as necessary to revive and sustain growth on a durable basis,” said the RBI press release.

The central bank appears to believe that inflation might not pose a huge risk immediately. The recent rise in vegetable prices had more to do with the rains, rather than any permanent issues, as per the RBI. It highlighted the measures taken by the government to manage palm oil price rises. However, some factors continue to drive core inflation upwards.

“Cost-push pressures from high industrial raw material prices, transportation costs, and global logistics and supply chain bottlenecks continue to impinge on core inflation. The slack in the economy is muting the pass-through of rising input costs to output prices,” said the RBI.

If inflation continues rising, MCLR could increase as well with a change in monetary policy, potentially affecting borrowers negatively.