Bank lending and deposit rates to continue to move higher

Even as the RBI has held its repo rate, banks are likely to take cues from the bond markets, where yields are likely to inch up
Contrary to widespread expectations of a rate hike, the RBI surprised markets (though not pleasantly) by holding its key policy repo rate — at which banks borrow short-term funds from the RBI. Even so, borrowers should not rejoice prematurely. Lending rates are set to move higher — rate hike or no — as banks will continue to take cues from the bond market. Risks to fiscal slippages, global factors and the depreciating rupee are likely to lead to hardening of yields in the coming months.

Banks have already been raising lending and deposit rates notably over the past six months. The

RBI reversing its neutral stance to one of calibrated tightening of monetary policy (slightly softer than a hawkish stance), does not rule out rate hikes in the remaining part of FY19. While the RBI has lowered its inflation projection for the second half of the fiscal, banking on benign inflation, there are multiple upside risks to the RBI’s inflation projection. We expect two rate hikes by the central bank by March 2019.

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