Next MPC Might Face Policy Divergence As Inflation And Monsoon Risks Build: SBI Research

The next Monetary Policy Committee (MPC) meeting of the Reserve Bank of India (RBI) will be important for borrowers and depositors as the central bank considers the inflation outlook and other domestic conditions, stated the SBI Research.

According to the SBI Research Ecowrap report, the latest MPC minutes have a more hawkish tone, with inflation risks and the possibility of future rate hikes in focus. The RBI Governor’s communication has been more cautious and data-dependent, with greater weight on growth and financial conditions.

The difference has raised the possibility of an October rate hike, according to the report. A rate hike could make loans costlier if banks pass on higher rates to customers. Borrowers with floating-rate home loans and other credit could see their interest costs rise. For new borrowers, higher lending rates could also increase the cost of taking a loan.

Home Loan EMIs May See An Impact

A change in interest rates can impact floating-rate home loans through either higher equated monthly instalments (EMIs) or a longer repayment period.

For a borrower, the actual impact would depend on the size of the rate change, the lender’s response, the outstanding loan amount and the remaining tenure.

Home loan borrowers could be more exposed because such loans usually involve large amounts and long repayment periods. A higher rate could also affect people planning to take a new home loan, as the total interest payable over the loan tenure may increase.

Other floating-rate loans could also be affected if lenders revise their benchmark-linked rates.

Inflation Outlook Could Impact Household Budgets

Inflation will be a key factor for the MPC. July Consumer Price Index (CPI) inflation came in at 4.45 per cent. SBI Research expects August inflation at 4.7 per cent and projects that inflation could cross 6 per cent in October and November before declining to around 5 per cent in the fourth quarter of FY27.

For households, higher inflation could put pressure on spending, particularly if food prices rise. This could leave less room in monthly budgets for savings or loan repayments.

Monsoon Adds To The Rate Decision

The monsoon outlook is another concern. The nationwide rainfall shortfall stood at 13 per cent, but the distribution has been uneven. Bihar recorded a 41 per cent deficit, Andhra Pradesh 39 per cent, Punjab 32 per cent and Karnataka 22 per cent. Of 741 districts, 351 had received deficient or large deficient rainfall.

SBI Research has also noted that the weaker monsoon outlook could affect the rural economy. It suggested that monsoon-related risks may need to be addressed through fiscal measures rather than monetary tightening.

The October MPC meeting will therefore be important for borrowers as the RBI weighs inflation risks, monsoon conditions and global developments before deciding its next policy move.