The status quo was on expected lines and Crisil expects the repo rate to remain unchanged over the next six months unless upside risks to the MPC’s inflation forecast materialise.
The status quo was on expected lines and Crisil expects the repo rate to remain unchanged over the next six months unless upside risks to the MPC’s inflation forecast materialise. Even with the RBI’s neutral stance, there was a de-facto interest rate tightening in the banking system. The risk-free rate in the economy – the 10-year government security yield – jumped 40 basis points (bps) this year so far on fears of fiscal slippage. But this has corrected now due to a trimmer borrowing programme announced by the government for first half of fiscal 2019 and Thursday’s MPC decision to keep the rates on hold. Meanwhile, banks also had started raising their deposit and loan rates after a nearly four-year rate easing cycle. Similarly, there could also be pressure on food inflation if elements of the minimum support price (MSP) announcement, such as setting it at 1.5 times the cost of production, extension of MSP to all kharif crops, and assuring at least MSP is paid to all farmers, together with rise in import duties are implemented. All this will need monitoring in the coming months. Fiscal pressures drove up the yield on the 10-year G-sec to 7.62% by March (average), from 7.18% in December. G-Sec yields have however, softened now. Similarly, banks, too, had started raising their lending rates led by two factors. Firstly, expected drying up of surplus liquidity from the banking system as the RBI aims to go back to maintaining neutral conditions, and secondly, return of demand for bank credit from corporates as interest rates in the bond market firm up. About seven to eight banks have raised their marginal cost of lending rate (MCLR) by about 10 to 20 bps in 2018 so far, suggesting that despite the repo rate staying unchanged, banks appear to be pricing in an expectation of turn in the interest rate cycle. With today’s non-move, the upside risks to lending rates has reduced.
The writer is chief economist, Crisil