Sectoral impact of RBI’s rate hike

The introduction of the Monetary Policy Committee or MPC headed by the Governor of the Reserve Bank of India to rejig the credit rate policy has evolved as an indispensable tool for the Indian economy to foster growth within its framework.

A headline policy rate termed as ‘repo’ rate is a primary tool used by the central bank to curb inflation and inject growth in economy. It is the key lending rate between the central and commercial bank, which is currently hiked by 25 basis points (bps) at 6.25% in its current bi-monthly meet. After maintaining a status quo with a hawkish stance during the first bi-monthly policy meet in April 2018, the six-member committee unanimously opted for a rate hike, although the market anticipated a hike to happen in the next policy meet scheduled in August.

The rise in core inflation rate and higher crude oil price, coupled with weakening of the rupee against greenback, and tightening of balance sheets by the US Federal Bank affecting the emerging markets prompted the policymaker to adhere on economic needs. The inflation rate, which is ahead of the RBI’s mid-term target of 4% at 4.58%, along with core inflation rate at 5.7%, and narrowing of supply gap provides a diminutive scope for the MPC to maintain status quo.

Nevertheless, a slow growth post demonetisation and the GST rollout, and venerable economic circumstance in corporate, it is unlikely to witness a complete shift in policy, as it continued with a neutral stance despite a rate hike in current policy meet.

The current rate hike was substantially factored by the market, as government and corporate bond yields moved in an upward direction in anticipation of a rate hike, and also increase in cost of borrowing for the businesses. Therefore, a rate hike of 25 bps could have an impact on various sectors of the economy, which has already been factored in most of the cases.

n Banking: A rise in repo rate has a direct impact on banks as the borrowing cost will get dearer, and which further induces to hike lending rate to maintain the profitability. In recent period, banks have already factored the rate hike by increasing corporate lending rates, and hence, it is unlikely to cause pain for the large banks. For instance, SBI raised its benchmark lending rates by 10 bps last week in anticipation of a rate hike, and many banks like ICICI Bank, PNB, and HDFC followed the suit.

Currently, SBI’s MCLR post interest rate hike stands at 8.25%, while MCLR of ICICI Bank is 8.40%. Subjectively, banks may witness a fall in retail lending on account of this rate hike, and relatively an upsurge in the cost of deposits, which is likely to dent the margin. However, as RBI allowed 2% more SLR carve to meet the liquidity ratio, the overall implication from the rate hike is slightly on a softer curve.

n Real Estate: Home loans are considered on the basis of the floating rate, which is linked with MCLR, and with a current hike in repo rate, it is expected to push the interest rate on home loans.

This is expected put a dent on the real estate sector in terms of volume growth over a higher payout. For instance, on loan of Rs 50 lakh for a period of 25 years at the rate of 8.50%, the monthly equated installment (EMI) comes at Rs 40,261. Now with a 25 bps rate hike at 8.75% over a same period of 25 years, the new monthly EMI comes at Rs 41,107. As EMI covers both interest and principle components, a consumer will shell out Rs 846 more from his pocket. Thus, the home loan borrower will get the pinch of rate hike, which would further create a negative sentiment.

n Automobile: A current rate hike by the apex bank will also have direct implications on the automobile sector, since a majority of new car buyers are funded through loans. Currently, the interest rate on auto loans range anywhere between 8.50% and 12.75%, wherein about 70% of the buyer finances their purchase through this loan. Off-late, automobile companies have consistently posted stronger volume growth month-on-month from both urban and rural segments, and thus, a rate hike would mean halt in demand for automobiles as it gets dearer. This would also push up the cost of purchase for manufacture on an account of higher borrowing cost, and thus passing on to end consumer.

n Infrastructure: Although the RBI cited a revival in economy growth, the uptick in investment in EPC-focused businesses have remained halted over a longer period. As cost of borrowing further heads north, credit takeoff and investment in these sector is expected to remain muted. The order inflow for the EPC companies have contracted in the recent quarter with growth over just 5-7% even on optimism expectation.

Overall the consumption theme will marginally come halt on account of dampening sentiment. However, in tandem with 25 bps rate hike, it is unlikely to cause major setback for the consumption driven economy by current hike. Although the cost of borrowings will marginally increase, alternatively consumers can also further expect a marginal revision on subdued deposit rates. Currently, consumers are at the front-end of the growth trajectory over softened industrial activity, and thus, revision on other liquidity tools will act as impetus for the domestic economy which beckons on consumption theme. Even if the RBI exercises a further rate hike in the current financial year, it is likely to consider consumer sentiment and growth trajectory to channel fair trade-off for the end-consumer through other liquidity tools.

(The writer is Founder and CEO of 5nance.com)