EMIs may be stable for now, but a rate hike may still be around this year

Home loan borrowers may have heaved a sigh of relief on Friday as the monetary policy committee of the Reserve Bank of India left the repo rate unchanged at 5.25%.

Repo rate is the rate at which the central bank lends money to commercial banks. Any rise or fall in this rate has a bearing on lending rates, more so if a loan is linked to an external benchmark like repo. Increasingly, more home loans are now linked to the repo, and the transmission here is quicker than traditional home loans that were linked to a bank's base rate or marginal cost of funds-based lending rate (MCLR).

While there may have been no change in rates this time, it may not remain so for long. Amid high oil prices and disrupted supply chains due to the conflict in West Asia, the RBI has raised its inflation forecast for the financial year by 50 basis points to 5.1% from 4.6% and simultaneously slashed the GDP growth forecast to 6.6% from 6.9%.

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RBI Governor Sanjay Malhotra warned on Friday that generalisation of inflation through second-round effects on expectations and wages is a distinct possibility, warranting a close vigil.

Several analysts expect the RBI may raise rates this year, more so if the war drags on for some more time.

"The sharper upward revision in inflation is not easily ignored, and it quietly keeps the possibility of rate hikes alive," noted Siddharth Chaudhary, head of fixed income at Bajaj Finserv Asset Management. 

The present inflation dynamics, with an average inflation forecast for FY 2027 inching up to 5.1%, have created a strong case for at least two 25 bps rate hikes between August and December 2026, felt Mandar Pitale, head, financial markets, SBM Bank (India) Ltd.

 "A neutral stance today does not imply a neutral trajectory. If West Asia does not stabilise and crude stays elevated, a rate hike in second half of FY27 is no longer a tail risk. It is a scenario markets may not be fully pricing in," said Sachin Sawrikar, managing partner, Artha Bharat Investment Managers.

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Aditi Nayar, chief economist at ICRA feels how the monsoon pans out this year, it's impact on farm output and in turn inflation, and any emerging sign of generalisation of inflationary pressures would drive the timing of the next rate action. She added that a rate hike in the October-December quarter couldn't be ruled out as of now.

Jahnavi Prabhakar, economist at Bank of Baroda sees the possibility of 1-2 rate hikes in the current financial year. possibly post October, since by then, there will be more clarity even on distribution of rainfall.

Dipti Deshpande, principal economist at CRISIL, however, doesn't see the MPC hiking rates this year. In the coming months, if energy prices normalise, then the MPC may look through the short-term rise in inflation, she felt. 

"The MPC will balance its inflation mandate with growth, where downside risks are also deepening with prolonging of the conflict. In the milieu, we expect the MPC to keep rates unchanged this fiscal," she said.

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