A day after the Central Statistics Office’s data confirmed that the Indian economy was firmly on the road to recovery, with annual growth in gross value added (basically GDP net of taxes and subsidy) rising to 6.7 per cent during July-December 2017, from 6.2 per cent and 5.6 per cent in the preceding two quarters, here comes a not-so-good piece of news.
The State Bank of India (SBI), on Thursday, announced a hike of up to 20 basis points in its MCLR or marginal cost of funds-based rate. The country’s leading bank’s one-year MCLR has been raised from 7.95 per cent to 8.15 per cent, while the same for two-year and three-year loans have gone up from 8.05 per cent to 8.25 per cent and from 8.10 per cent to 8.35 per cent, respectively.
ICICI Bank and Punjab National Bank – India’s No. 2 and No. 3 banks by assets – have also increased their MCLRs with effect from March 1, albeit by only 10 and 15 basis points, respectively. The one-year MCLR of both are now 8.3 per cent.
The MCLR refers to the minimum interest rate below which a bank cannot lend for various tenors. Banks benchmark their interest rates on loans – whether for home and auto purchases or for businesses – to the MCLR, which is supposed to reflect the average cost at which they borrow or raise deposits for the corresponding maturities.
The significant part about the just announced MCLR increases – which would ultimately translate into higher equated monthly installments or EMIs for home-loan and other borrowers – is that they come even without the Reserve Bank of India (RBI) hiking its benchmark repo or overnight lending rate.
Also, they point to a reversal of the low interest rate regime that was seen especially after demonetisation, when banks experienced a surge in liquidity from the suddenly invalidated Rs 500 and Rs 1,000 denomination notes being deposited into current and savings accounts. The flood of deposits resulted in the SBI alone bringing down its one-year MCLR from 8.90 per cent to 7.95 per cent between November 1, 2016 and November 1, 2017, while reducing it similarly from 9.05 per cent to 8.10 per cent on three-year loans.
But that surfeit of liquidity is clearly history. The first indication of it has been rising bond yields. Since September, the Government of India’s 10-year bond yields – which is the effectively the rate on its borrowings – have soared from below 6.50 per cent to around 7.75 per cent. Again, this 125 basis point increase has taken place, despite the RBI keeping its repo rate unchanged at 6 per cent, having last cut it from 6.25 per cent on August 2. The tightening of liquidity has already forced banks to offer higher deposit rates: SBI, only on Wednesday, hiked the interest on term deposits by 15-50 basis points. That would automatically have pushed up its cost of funds, resulting in higher MCLRs.
The higher cost of borrowings, along with costlier oil, can potentially impact profit margins of companies and overall consumer sentiment. At a time when the economy seems to have finally tided over the disruptions from demonetisation and the rollout of goods and services tax, a hardening of interest rates may not augur well. And unlike in the past, when the RBI could have sharply cut rates even if did not, there is nothing that the central bank, too, can do today.
via Low interest rate party over: Here is why top banks hiking MCLR is not good news | The Indian Express