- The country’s largest public sector bank, State Bank of India (SBI), today announced that it has hiked the base rate by 10 basis points (bps).
- This signals the start to the end of regime of low interest rates. Besides being a reference rate for borrowers, the base rate also works as an indicator of the direction of the overall interest rate in the economy.
An increase in base rate indicates that the falling interest rate trend is finally reversing and going forward we may see a few more hikes in interest rates. Crude oil (WTI) prices after falling to $65 level in beginning of December have now risen close to $72 on December 16 which inturn indicates the revival of global demand.
- If the impact of Omicron variant of Coronavirus on global economy remains manageable and given double digit rise in WPI (Wholesale Price Index) in India which may later have spillover effect on CPI (Consumer Price Index), the likelihood of RBI raising the rate in coming future cannot be ruled out.
- Rising interest rate is good news for fixed deposit investors who have been getting one of lowest returns in the last 2 decades. And the same time this is bad news for borrowers who have been enjoying decadal low interest rates.
What is a bank’s base rate?
Base rate is the minimum interest rate at which a bank could lend to its customers who have their loans still under base rate regime. As a result, the overall interest rate of these old borrowers with floating rate loans like home loans will go up due to which they will either pay increased loan equated monthly instalments (EMIs) or will have their loan tenure extended.
SBI’s revised base rate of 7.55% per annum will be effective from December 15, 2021.
Will other loan regimes be impacted?
This base rate hike is unlikely to remain limited to base rate only as we may soon see other benchmark rates like MCLR and external benchmark being hiked as well going forward. SBI being the market leader, other banks are likely to follow suit and raise their lending rates in coming days.