On taking the charge in September 2013, the new RBI governor had said that "at a time when financial markets are volatile, and there is some domestic political uncertainty because of impending elections, the Reserve Bank of India should be a beacon of stability as to its objectives. That is not to say we will never surprise markets with actions. A central bank should never say "Never"! But the public should have a clear framework as to where we are going, and understand how our policy actions fit into that framework". This might give you a feeling that RBI may rarely surprise with its policy actions. But if you see the market consensus, thrice it was opposite of what RBI actually did in its policy, out of last four policy announcements. RBI has a contrary view that even if it cuts policy rates banks may not cut lending rates. So under such a scenario you might be worried about what will happen to your home loan EMIs and fixed deposits when any policy decision is taken.

What may change now?

It has been observed that, banks do not hike rates on deposits immediately when repo rates are hiked and vice-a-versa, Lending rate too don't react to policy rate actions immediately. For example, With 3 hikes in last 3-4 months, it was anticipated that, bankers may pass on the rate hikes to customers by hiking deposit rates and also the lending rates. But very few banks have responded with upward revisions in interest rates. Since the credit demand has been low, banks fear that they may lose business if they hike lending rates. Therefore it is now safe to assume that banks may not take any action till their margins are not affected to unaccepted level.

What might prompt banks to increase interest rates?

Long term deposit rates are benchmarked against anticipated rate of inflation. But, to offer real rate of returns, banks should pay interest at a rate over and above the rate of inflation to their customers. However, in the short term, more than expectation of inflation, scarcity of the fund and the cost of short term borrowing at Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) window decide the rates on short term deposits. Whenever, there is a cash crunch, short deposit rates go up as banks borrow at a higher rate to meet demand-supply mismatches. Since RBI has now decided to focus on making inflation measured by Consumer Price Index (CPI) a nominal anchor for the monetary framework, anticipation of inflation at consumer level may broadly decide the rates on deposits. RBI may carry out Open Market Operations (OMOs) to inject liquidity when needed. Urjit Patel committee recommended RBI to adopt a target of 8% inflation (at consumer level) to be achieved within in a year. Long term target remains 4% with a margin of (+/-2%). Although it is expected that banks should facilitate transition of monetary policy decisions by passing on increase or reduction in rates to customers, it may happen with a time lag for aforesaid reasons.

For now, RBI has given a soft guidance saying it anticipates no further monetary tightening in the near term, if inflation falls as projected. PersonalFN believes, it is possible that a few banks may go in for a hike in interest rates but broadly banks may maintain status quo. PersonalFN is of the view that, instead of basing your decision on what RBI might do at its policy meets, you should focus on your life goals while opting for a loan or keeping deposits with a bank.

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