Off-cycle rate changes or increases by the RBI are not novel, yet they still catch many off guard. The RBI has frequently abruptly raised or lowered the nation’s policy repo rate whenever the circumstances call for it. In an unscheduled MPC meeting scheduled for November 3, something similar is anticipated once more. The most likely outcome of this additional MPC meeting is another rate increase. Since the RBI started its rate-hike trends this fiscal year, the impact has been felt with bank lending rates increasing and EMI getting more expensive. What would the November 4 rate hike by the RBI entail for future loan EMIs?
On October 27, RBI made a further MPC meeting announcement for November 3, 2022.
The prior policy’s minutes of the meeting said that the MPC’s following meeting would take place between the dates of December 5-7, 2022.
However, the November 3 meeting was unexpected, particularly as it occurred the day before the FOMC decision for the November 2022 policy, when the majority is anticipating yet another dramatic rate hike of 75 basis points to control the US’s multi-decadal high inflation.
We all saw the unexpected 40 basis point increase in the repo rate at the beginning of current fiscal year FY23 on May 4, 2022, which also happened to be an unscheduled MPC meeting. The choice had been necessary, especially in light of rising inflation pressures and geopolitical unrest. The cycle of rate increases was just getting started, and the RBI wasn’t the only significant central bank to do so. Examples include the US Federal Reserve and the European Central Bank.
For the fourth consecutive policy since May 2022, the RBI has increased the repo rate by 190 basis points. The repo rate is currently 5.90%.
Banks have raised their lending rates in response to the rate hikes. The weighted average lending rate (WALR) on new rupee loans made by SCBs increased by 26 basis points (bps) from 8.33% in August 2022 to 8.59% in September 2022, according to the most recent statistics from the RBI.
Additionally, the SCBs’ 1-Year median Marginal Cost of Fund based Lending Rate (MCLR) increased from 7.75% in September 2022 to 7.90% in October 2022.
Why is there a possibility of a rate hike from the November 3 meeting?
First off, while inflation is still high and is predicted to start slowing from the upcoming fiscal year, the bulk of experts have factored in rate hike tendencies through the end of December 2022.
India’s inflation hit a 5-month high of 7.41% in September 2022 (the most recent reading) as a result of skyrocketing food prices. The rate of inflation is still at a multi-year high. Additionally, for the ninth consecutive month, the consumer price index (CPI) has exceeded the RBI’s upper tolerance limit of 6%.
By the end of FY23, according to the RBI’s previous policy (September 2022), CPI inflation will have reached 6.7%. 6.5% is the inflation rate predicted for Q3 and 5.8% for Q4 of FY23. The inflation rate is estimated to be 5% during the first quarter of FY23.
RBI’s monetary policy decisions encourage growth while aiming to achieve the medium-term consumer price index (CPI) inflation target of 4% within a +/- 2% range.
The rupee loses versus the US dollar as foreign exchange reserves fall, inflation remains under pressure, and markets are still erratic. On the other hand, “recession” concerns persist in key economies like the US and Europe, along with geopolitical unrest, supply-chain disruptions, and energy crises. These and other issues have clouded the outlook for global economic growth.”The Reserve Bank of India’s Monetary Policy Committee’s unscheduled meeting this week is unlikely to spring a surprise with an off-cycle rate hike, even though it comes a day after the Federal Reserve’s policy decision and as unseasonal rains that have damaged crops intensify the inflationary pressure on the Indian economy,” said Rahul Chander, MD & CEO of LivFin, in reference to the RBI meeting on November 3.
Chander claims that the MPC has increased the key policy rate by a total of 190 basis points since May, bringing the repo rate to pre-Covid levels. Another element that will influence the RBI’s decision to raise rates at this time is the positive employment data, which showed growth at the quickest rate in three years as a result of robust manufacturing output.Frequent increases in interest rates not only reduce the number of loan takers but also carry a significant risk of default from current borrowers, Chander continued. “If the MPC goes for another round of rate hike, it will add to the concerns of NBFCs as they struggle to maintain profitability in an already difficult economic environment,” he said.
For an NBFC, Chander continued, “the measurement of profit is the difference between the cost of borrowing, which essentially suggests that these institutions have to acquire funds in order to lend them to consumers, and the cost of credit, which means additional fees on loans.”
Since May of this year, both banks and NBFCs have dramatically increased their benchmark lending rates in order to pass along the increase in the cost of borrowing funds that occurs when rates are raised.
Dr. Joseph Thomas, the director of research at Emkay Wealth Management, stated last week: “The market is currently contemplating with caution the special additional meeting of the MPC that the RBI has called for November 3, 2002, as well as the possibility of further rate hikes in light of the ongoing inflation. As we sail into the new week, the markets could continue to be volatile.”
The conclusion of the RBI meeting will have a significant impact on how the market feels in the days to come.
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