Borrowing terms

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.