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Will Banks Raise Interest Rates?

IndianMoney.com Research Team | Updated On Monday, July 23,2018, 02:46 PM

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Will Banks Raise Interest Rates?

 

 

 

Crude Oil prices have been rising in recent times. As India imports more than 80% of its crude oil requirements, prices of petrol and diesel are going up. Prime Minister Narendra Modi had said in the February Union Budget that the Government plans to buy crops at 1.5 times the cost of production.

What does this mean? To understand this, you need to familiarize yourself with the term Minimum Support Price popularly called MSP. MSP is the price at which the Government purchases crops from farmers, irrespective of the price of the crops. If the Government buys crops at 1.5 times the cost of production, this will push up prices. Inflation will rise in the economy.

Take a look at CPI Inflation (a measure of retail inflation), in the economy. India’s retail inflation has increased to 5% in June from 4.87% in May because of rising fuel prices. RBI has stepped in to control Inflation. It hiked the repo rate by 0.25% to 6.25% in the June policy review meet. Expect another 25 bps rate hike in the repo rate in the August policy review meet, as RBI tries to rein in inflation.

What could be the effects of this? Will banks raise interest rates? Will your home loan interest rates rise? Let’s find out?

Want to know more on Home Loans and Fixed Deposit? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.

 

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Will Banks Raise Interest Rates?

 

1. Home loan rates could rise

 

The RBI hiked the repo rate from 6% to 6.25% in the month of June. Many Banks hiked MCLR rates effective June 1st even before the June 6th policy review, anticipating a hike in repo rates.

Marginal Cost of Lending Rate popularly called MCLR, is the minimum interest rate of a bank below which it cannot lend. If banks hike MCLR, home loan interest rates, car loan rates and personal loan rates could rise. Leading banks like SBI, ICICI Bank, Kotak Mahindra Bank and PNB had hiked the MCLR rates.

See Also: SBI Raises Interest Rates Home Loan Gets Costly

Now to the big question…Will banks hike home loan rates? Let’s say you are an existing borrower who has already availed a home loan from a bank. If you have already availed a home loan from a bank which has hiked MCLR, your home loan interest rates are going only one way, UP.

MCLR-linked loans have a reset clause from maybe 6 months to a maximum of one year. On the reset date, your future EMIs will be calculated based on the MCLR, effective on that date.

So, if your bank has increased MCLR, expect your home loan interest rates to go up. Now, the RBI will most probably increase the repo rate by 25 basis points in the August bi-monthly policy meet. Banks could hike MCLR and when the reset date of your MCLR-linked home loan arrives, expect higher home loan EMIs.

 

SEE ALSO: Important Clauses In A Home Loan Agreement

 

2. Fixed Deposit rates could go up

 

If the RBI hikes the repo rate, banks could give you a higher interest on FDs. When the RBI hikes repo rates, banks are quick to transfer this hike to customers. This means higher interest on FDs and also on home loans.

The reverse might not be true. If RBI cuts the repo rates, banks may not transfer the benefits of lower interest rates to customers.

In the month of June, SBI and Axis Bank hiked the fixed deposit interest rates. There’s a chance that banks will hike FD interest rates offered by 25 basis points in the coming months, if RBI hikes the repo rate in August.

This is good news for senior citizens who depend on Fixed Deposit income to meet expenses in retirement. Banks generally offer a higher interest to senior citizens and if banks hike FD rates, senior citizens could soon enjoy an interest of 8% a year on their FDs on deposits of higher tenure.

If you love to make investments in FDs and Recurring Deposits, expect higher interest on investments.

 

Be Wise, Get Rich.

 

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