Borrowing terms
Red Book
Red Book

GS Advance Program for UPSC Mains 2025, Cohort - 1 Starts from 24th October 2024 Click Here for more information

Borrowing terms

Context:

  • The State Bank of India (SBI) has raised its one-year MCLR or marginal cost of funds-based lending rate from 7.95 per cent to 8.15 per cent, while hiking similarly for two- and three-year loans.

Background:

  • The increase in MCLRs comes in the wake of rise in deposit rates.
  • SBI revised its upward retail term deposit rates by 0.15-50 percentage points.
  • Also, since September 2017, yields on 10-year Indian government bonds effectively the interest on the sovereign’s borrowings have gone up from around 6.5 per cent to 7.75 per cent.

Impact of the decision:

  • The interest rate cycle has turned.
  • It is an end to the ultra-low interest rates, resulting from the monetary stimulus measures unveiled by major central banks in response to the 2008 global financial crisis.
  • It is to be noted that such low rates for borrowers were neither sustainable nor fair to savers, especially fixed income earners.

Impacts of higher interest rates:

  • Higher interest rates aren’t favourable for the economy, just when it seems to be on the recovery path.
  • Together with rising oil prices, they could potentially squeeze profit margins and hurt consumer sentiment.
  • Also, there is clear evidence of a revival in bank credit demand.
  • This is where fiscal slippages and election-time populism on minimum support prices can really hurt.
  • By crowding out private sector borrowings and forcing the RBI to counter food inflation by tightening monetary policy, there is the danger of interest rates increasing more than what’s warranted.
Print Friendly and PDF
Blog
Academy
Community