Loans to get costlier as RBI hikes repo rate again

The Reserve Bank on Wednesday pegged retail inflation at 4.8 per cent for the second half of current fiscal expecting increase in food prices due to hike in minimum support price

He said the final Brexit deal was "potentially the most important" factor that would influence monetary policy in the coming months and years, and added that the Bank was ready for all outcomes.

Inflation is forecast to fall back to 2% - the Bank of England's target - by 2020.

The Reserve Bank today retained the GDP forecast for the current fiscal at 7.4 per cent on robust corporate earnings and buoyant rural demand, though it flagged global trade tensions for Indian exports.

The central bank maintained its neutral monetary policy stance with the objective of containing inflation at 4 per cent within a band of 2 per cent, while supporting growth.

RBI also raised the inflation projection to 4.6 per cent in second quarter of fiscal 2019, 4.8 per cent in second half of 2018-19 and 5 per cent in first quarter of 2019-20.

In the Inflation Report accompanying the decision, the BOE kept its economic-growth predictions for Britain broadly unchanged.

"The labour market has continued to tighten and unit labour cost growth has firmed".

The overall banking system liquidity continues to be pressured, with liquidity deficit witnessing a sustained increase in the last three weeks.

The National Institute of Economic and Social Research (Niesr) warned on Wednesday that the Bank should raise interest rates on Thursday, but "stand ready" to reverse the hike if circumstances change. "Short-term debt funds are expected to deliver lower volatility and low risk in this scenario". This means marginally higher interest earnings for customers opening fixed deposits with banks.

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In a public lecture in March, RBI governor had emphasised on the need for banking regulatory powers that are neutral to bank ownership, to provide a level playing field between public sector and private sector banks.

"The UK can be affected by a trade war scenario and a sharp ramping up of tariffs and assymetric response, everybody responding with the U.S.at the center. On the other hand, the announcements of additional open market operations by the RBI could help cap the G-sec yields". With the new hike, home loans and EMIs are expected to become costlier. This will affect EMIs of housing and automobile loans for consumers.

Some economists have raised doubts about the case for the rate hike.

David Alexander, managing director of the leading Scottish estate agents DJ Alexander, said: "I believe that the increase will not have a detrimental impact on the Scottish property market, whose growth in several areas is out-pacing the rest of the UK".

"This base rate rise carries much expectation, with savers hoping it will boost returns". In a rising rate scenario, it makes huge sense for customers repaying loans to make periodic principal pre-payments. What impact will it have on your mortgage, savings and the property market? "The mistake is to always wait wait wait until you have flawless certainty".

He said: "Someone on the average 4.75% standard variable rate borrowing £150,000 over 25 years would save over £6,000 over two years (before fees) by switching to the best two year fix".

"As a result, r* can be expected to rise gradually".

Bonds extended gains, with the yield on the 10-year benchmark note down 5 basis points to 7.72 per cent. He added that this would now obviate the chances of another hike in October.

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