[Interest Rates ]Borrowing terms | The Indian Express–05.03.2018

The State Bank of India (SBI) has raised its one-year MCLR or marginal cost of funds-based lending rate from 7.95 per cent to 8.15 per cent, while hiking similarly for two- and three-year loans. So have the ICICI Bank and Punjab National Bank, even if not by as much. The increase in MCLRs, below which banks cannot lend, was preceded by a rise in deposit rates. SBI alone, last week, revised upwards its retail term deposit rates by 0.15-50 percentage points. But it isn’t only banks. Since September, yields on 10-year Indian government bonds — effectively the interest on the sovereign’s borrowings — have gone up from around 6.5 per cent to 7.75 per cent. And all this without the Reserve Bank of India (RBI) resorting to any monetary tightening; Its key repo or overnight lending rate has been unchanged at 6 per cent.
The above trends point to a simple fact: The interest rate cycle has turned. This is true not just for India, but also globally. Since September, 10-year US Treasury yields, too, have hardened from 2.1 per cent to almost 2.9 per cent, while way above the 1.4 per cent lows of July 2016 just after the UK’s “Brexit” vote to exit the European Union. What we are seeing is an end to the party of ultra-low interest rates, resulting from the monetary stimulus measures unveiled by major central banks in response to the 2008 global financial crisis.
In India, we had a similar situation after demonetisation, when banks were flooded by deposits of the suddenly invalidated Rs 500 and Rs 1,000 denomination notes. The surge in liquidity led the SBI to lower its one-year MCLR from 8.90 per cent to 7.95 per cent between November 1, 2016 and November 1, 2017. Even the SBI’s current MCLRs, across all tenors, are 0.7-0.75 percentage points below what they were till December 2016. Such low rates for borrowers were neither sustainable nor fair to savers, especially fixed income earners.
One can, of course, argue that higher interest rates aren’t the best thing for the economy, just when it seems to be on the recovery path. Together with rising oil prices, they could potentially squeeze profit margins and dent consumer sentiment. Also, there is clear evidence of a revival in bank credit demand. This is where fiscal slippages and election-time populism on minimum support prices can really hurt. By crowding out private sector borrowings and forcing the RBI to counter food inflation by tightening monetary policy, there is the danger of interest rates increasing more than what’s warranted.

via Borrowing terms | The Indian Express

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