Reasons Why Lending Rates May Still Increase Despite RBI's Status Quo

Though the monetary policy committee headed by RBI Governor Urjit Patel kept key policy rates unchanged while revising its GDP growth estimates higher and lowering inflation forecast, many of the experts see lending rates to increase in the short to medium term due to a trigger from some of these concerns:

Reasons Why Lending Rates May Still Increase Despite RBI's Status Quo

1. Borrowing programme of the govt overshoots: In case the government overshoots its borrowing programme during the second half of the ongoing fiscal year, bond yield would again spike which got some breather after RBI's monetary policy stance.

On February 20, benchmark 10-year bond yields climbed to a two-year high of 7.66 per cent. The pressure on the bond market is vigilant for some time now due to rise in consumer inflation, crude oil price and government's fiscal imbalances.

Recently, the government has fixed its borrowing target for the first half of 2018-19 at Rs 2.88 lakh crore.

2. RBI's directive to align base rate with MCLR and rising cost of funds for banks: This advisory of the central bank can also push the interest rates higher as banks to adhere to the norms are upping their bank rate and benchmark prime lending rate (BPLR).

MCLR is a new rate regime introduced in the year 2016 which is based on the current cost of funds as against base rate which is based on the average cost of funds to the bank. And as cost of funds has recently increased for the banks it may well be the case that interest rates go higher in the trajectory from current levels. As per experts, interest rates are poised to rise after four year easing cycle.

3. Deteriorating asset quality or NPAs: Pain for the troubled banking sector sees no end as according to reports lenders stare at a potential bad loan volume of Rs 2.5 trillion from the power sector. In its monetary policy statement for FY 19 RBI said that burdened with rising non-performing assets (NPAs), the country's banking system finds itself unable to pass on the benefits of an easing monetary policy to its customers.

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