RBI has to first ponder over impact of previous rate hikes

Even though CPI inflation has come down slightly, the Reserve Bank of India (RBI) is advised not to take cue from the trend so as to raise key policy rates. Although, CPI inflation has moderated mildly, it remains above the six per cent mark. In fact, CPI stood at 6.44 per cent in February as compared to 6.52 per cent in January. So far in the current fiscal, the 250-basis point rate hike has been correctly frontloaded even though the time has perhaps come for RBI to pause and rethink the impact of past rate hikes. With the rise of 250 bps in repo rate from last May, the incremental housing loans of ASCBs have increased by over Rs 1.8 lakh crore in April-Jan compared to Rs 1.4 lakh crore in the year-ago period.

The results show that on an average the proportion of home loans up to Rs 30 lakh in total loans disbursed has declined to 45 per cent during January-February from around 60 per cent of the total disbursals in the June quarter.

Meanwhile, if one looks at the above Rs 50 lakh loans, its share has increased from 15 per cent to 25 per cent of the fresh housing loans during this fiscal, indicating that the demand for housing loans by those in the lower end of the strata, who take loans for affordable housing, has been hit considerably. An Ecowrap analysis indicates that of around 55 lakh home loan accounts linked to EBLR, nearly 47 lakh customers with loans amounting to nearly Rs eight lakh crore witnessed increase in tenure, EMI or both in their existing home loans.

The study believes that the bias of the markets siding with pre-fabricated rise in numbers need to be jinxed, by taking smaller hikes of 10/15 bps, if at all, that should augur well for the markets, with the customers paying higher for longer installments and the regulator too to gauge the impact of its previous actions in controlling the spiral of the last 10 months.

Given two consecutive CPI inflation prints above six per cent, the MPC may go in for another rate hike, says Icra, although the decision is unlikely to be unanimous going by the minutes of the previous review. Moreover, global developments over the next three weeks could impact MPC's decision, one way or the other. At current levels, elevated consumer inflation widens the scope of the RBI to hike the key policy rate in its next MPC meeting. However, since most of the price pressure at consumer level is arising from food inflation, which is more sensitive to seasonal factors, there is less scope of softening inflation due to any further rate hikes. Rather, a Knight Frank analysis says, a combination of increase in consumer prices along with a further rise in interest rate could be a double whammy to domestic economic growth.