The MPC of the Reserve Bank of India on Friday hiked the policy by 50 basis points to 5.4 per cent - a three-year high since the war broke out in Europe in February.
The home loan rates of some major lenders like State Bank of India will increase by 8 per cent. The home loan rate for many lenders is 7.55 per cent linked to the external benchmark or the external benchmark.
While the six members were unanimous on the rate increase, external member Jayanth Varma dissented on the MPC's statement on withdrawal of accommodation While the rate hike was at the higher end of the expectation spectrum, the hawkish tone of RBI Governor Shaktikanta Das stumped the bond market, which rallied this week in expectation of the central bank indicating that large rate hikes might not be in the offing after August action.
The yield of the 10 year government bond fell 17 basis points in the past four days, but ended up 14 basis points higher to close at 7.30 per cent.
According to Abheek Barua, chief economist, HDFC Bank, we expect the RBI to continue with its rate hikes in the upcoming policies, taking rates up to 5.75 per cent by the end of the year.
The bond market rally seen over the past few days is likely to reverse and we expect the 10 year paper to trade closer to 7.3 -- 7.4 per cent by the end of the quarter as the markets reprice RBI's action, Barua said.
Despite headwinds from the external sector, monetary policy should persevere further in its stance of withdrawal of accommodation to make sure that moves close to the target of 4.0 per cent over the medium term, according to Das during the post-policy interaction with the media.
The stressed high prices could cause inflation expectations to be destabilised and harm growth in the medium term.
Today s 50 basis point hike is an indication that the RBI is more concerned with the rupee and external situation than the rupee. Soumya Kanti Ghosh, group chief economic advisor, State Bank of India said that the interest rate was a defence to protect the rupee.
The central bank said that the banking system tightened at the end of July, leading to the firming of money market rates above the repo rate.
Das said the RBI would remain vigilant on liquidity and conduct two-way fine-tuning operations as and when warranted - both variable rate repo VRR and variable rate reverse repo VRRR operations of different tenors.
The central bank sounded confident on growth. There were mixed signals on the rural side, as Das pointed out improvement in urban demand.
In the manufacturing sector, capacity utilisation is now above the long-run average, signalling the need for new investment activity in capacity creation, Das said, while pointing to 14 per cent y-o y bank credit growth.
Deposit growth has been lagging, requiring banks to make their deposits more attractive by increasing interest rates, despite the fact that credit is expanding at a healthy pace.
If there is credit offtake, banks can sustain and support it only if they have higher deposits. Banks will raise deposit rates and they will try to mobilise more deposits because of the fact that they can't rely on central bank money on a per-day basis for supporting credit offtake.
The weighted average domestic term deposit rate for outstanding and fresh rupee loans went up by 19 and 31 basis points from March 2022, and the weighted average domestic term deposit rate for outstanding deposits has gone up 10 basis points during the same time, according to SBI Research.
The RBI data shows that the credit-deposit ratio has gone from 77.2 per cent at the end of March to 246.8 per cent as of June 17.