Soon after India’s leading banks such as the State Bank on India (SBI), Punjab National Bank (PNB) and ICICI Bank hiked their marginal cost of funds-based lending rates (MCLR), HDFC Bank too has announced an upward revision in its MCLRs. It has increased its MCLR-based lending rates by 10 to 15 bps. With this, HDFC Bank’s one, two and three-year MCLRs now stand revised at 8.30%, 8.45% and 8.60%, respectively, effective March 7, 2018, as against 8.20%, 8.30% and 8.50% earlier.
Financial experts say that lenders take a relook at their deposit and lending rates in the last quarter of the year to align themselves with the market conditions in response to the demand and supply of money. However, with key lenders, both public and private-sector ones, increasing their lending rates, consumers would have to shell out more from their pockets now.
“With the latest revision, the cost of most loans would go up. New loans will have a higher rate of interest, while the existing loans will become costlier when the MCLR is reset at the end of the reset period. A 15 bps increase on a Rs 40-lakh home loan at 8.50% would mean a difference of almost Rs 1 lakh. Property buyers who are looking to invest would be advised to make their investments in the near future as this continues to be a good time to invest. The interest rates look poised to remain steady or move up marginally, as opposed to coming down any time soon,” says Adhil Shetty, CEO, Bankbazaar.com.
You also need to remember that taking the RBI concern on inflation in view, interest rates are likely to move up in the near term. This means that you can also expect an increase in the lending rates soon. However, there is also a change happening from 1st April 2018. As per the RBI directive, all banks who still use base rate for home loans have to shift to MCLR. This means the loan rates will be more aligned with the cost of funds of banks.
“This is a welcome move, but borrowers will also witness frequent changes in the rates of their housing loans. For, whenever banks see the cost of funds rising for them, they will increase the housing loan rates. Borrowers should be prepared for this change in the near term if inflation does not ease out, forcing the RBI to maintain its stand. On the other side, short-term funds will maintain their attractiveness while 10-year yield may move upwards if there is any increase in interest rates,” says Jitendra P S Solanki, a Delhi-based financial planner.
One positive fallout of this reversal of long-term softening interest rate cycle is that interest rates on deposits will also go up. However, experts advise that your investment decisions need not change with interest rate cycle turning upwards as equities still remain the best option for capital formation. “Also, fixed deposit rates are not likely to ever generate after-tax returns higher than inflation. The movement of interest rates on the way up is likely to be slow and according to me fixed deposit rates are very unlikely to reach the peak of 10%, which we witnessed a few years back,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.