Lending Rates Set For A Raise: Should It Worry A Borrower?

After the policy review meet on February 7, 2018 in which the policymakers maintained status quo with no change in interest rates, there has been a case in which some private lenders including HDFC Bank and Axis Bank have hiked their lending rates. And this is most likely to be followed by other bankers.

Some of the reasons that EMIs of borrowers are set to rise have been listed below:

1. Credit demand has increased: As the effects of disrupting demonetisation and GST are soon receding to a point that they are rejigging the overall business environment in a positive way, it is known that the demand for credit has been gearing and hence to meet it lenders have raised deposit rates to attract more and more funds.

2. Inflation worries pushed bond yields higher: All of the economic barometers including the likes of inflation, interest rates and bond prices have a connection that cannot be ignored. And when talking about govt bonds, with the inflation crossing the safe estimate of 4% of the RBI, yields on benchmark bonds have moved up by 100 basis points since July 2017.

And so how does rising yields impact banks that may be a likely question you may be having on your mind. To answer this banks are the biggest investors in these govt bonds and any rise in bond yields impact their investment in them to a large degree.
In the recent past, when the bond yields surpassed the levels of 7%, there resulted a huge mark to market loss for the banks.

So, to curb an over rallying on these fronts and also due to the cost of funds which has hurted the sentiments of bankers in a big way, a push in lending rates and hence in your EMI is likely to be eminent in the near future. But as a good news, against the current regime, wherein deposits fetched lower returns, interest rates on them is most likely to be raised.

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