Uday Kotak On RBI's Surprise Rate Hike: 'There Was A Need To Act'
High inflation and the fear that inflationary expectations will get entrenched required policy action, said banker Uday Kotak on the sidelines of Kotak Mahindra Bank's quarterly earnings announcement. "There was a need to act," Kotak said responding to a question on the Reserve Bank of India's surprise rate hike.
Kotak cautioned that more may follow if real interest rates, which adjust for inflation, are to be positive. At present, inflation is running higher than the policy rates and deposit rates offered by banks. This acts as a disincentive for savers.
Edited excerpts below:
What is your reaction to the RBI's surprise rate hike?
I think we have to ensure that inflationary expectations do not get entrenched. Therefore, there was a need to act and I'm glad that policymakers have recognised the need to act.
Do you see more rate hikes in this cycle?
I believe rate hikes have to be consistent with the point that we need positive real interest rates at some point in time.
If you look at RBI's April estimates for inflation in Q4, it was 5.1%. Therefore, to go to even zero real rates you need a repo rate of at least 5.1% if those estimates hold. If inflation goes higher, repo rates will have to keep pace.
How do you see this impacting home loan borrowers and demand for home loans, which has been strong?
When a person decides to take a home loan, one factor is the rate of interest but even more important is expectation of future home prices. Keep in mind that developers' costs of inputs is also going up. What has been sold in recent times is existing inventory. There will come a time when the new inventory has to come in, the cost of that inventory will be actually higher. So a consumer must think what price the home will be before focusing only on the home loan rate.
What does Uday Kotak think about the RBI's surprise rate announcement? @Nidhirai87 asks.
May 4, 2022
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