Interest Rates and Us
As all our education loans are on floating rates, we all feel the pinch of a rise in interest rates every few weeks. Ever since the MPC meeting in May this year, the RBI has been on track to raise the interest rates to pre-pandemic levels. The floating rate loans are immediately affected as their rates are based on the MCLR or Marginal Cost of Funds Lending Rate. The MCLR is a live calculated rate based on how costly it is for the banks to raise funds from their sources. The transmission of monetary policy is instantaneous when it comes to rate increases. Contrasted with the slashing of repo rates, banks tend to hold off on lowering consumer side rates to shore up their net interest margins. The result is we are on track of watching our interest costs go up. Since the student loans are under moratoriums, this outstanding interest is going to have a compounding effect on our total outstanding amount.
The reason for a raise in interest rates is the economic cycle and where we are in it. From the peak of 2012-2014, there has been a gradual decrease in rates as the economy accelerated back from the lows post-2008. This growth began slowing towards the end of 2018, which is when rates were being aggressively slashed. Then came 2019, an election year and the economy was boosted because of it. 2020 became a black swan that no one thought of. The RBI reduced the rates to their lowest ever. Our savings bank interests fell and so did our interest rates for loans. This was the case until May of 2022. As the economy absorbed the pent-up demand of two years, inflation became rampant and the RBI could not hold off raising rates any longer, calling the inflation “unacceptably and uncomfortably high”.
The RBI has raised repo rates three times since May, from 4% to 5.4% by 5th August 2022. This has pushed lending rates by upto 200 basis points. Whether a further rise in rates is on the cards depends on how inflation pans out and how international commodity prices remain for the foreseeable future. The RBI’s primary objective of managing inflation to promote economic growth is imperative. As seen in recent days, the demand for manufactured goods is pretty strong. We can expect a strong demand economy as disposable incomes increase, coupled with the spread of banking to an even greater population of the country.
We, the consumers, need a comfortable level of inflation and comfortable interest rates. However, even Dumbledore’s wand can’t give us both. There is always a trade-off between the two. As we come into this new growth cycle, rates are expected to rise for some time until we reach peak growth and then the rates will taper off to support the growth for some more time. For us, the MCLR will keep fluctuating every few months and so will our interest costs. The RBI can only play the balancing hand and the economy goes on.
Author : Siddharth B. Singh
About Author : Student (PGP /08)