CB lifts caps on select lending products after aggressive rate hike

• Applies to credit cards, pre-arranged temporary overdrafts and pawning facilities
• Credit card interest rates likely to go up near 40% from the current 20% levels
• Reserve Bank of India left its benchmark repurchase rate unchanged at 4% on Friday 

The Monetary Board, which met on Friday, removed the ceiling rates applicable on certain administratively managed lending products such as credit cards, pre-arranged temporary overdrafts and pawning facilities with the effective date to be announced in the coming days.

The move comes about three weeks since the Central Bank raised the administrative caps on the three financial products effective from March 14, 2022 to 20 percent, 18 percent and 12 percent respectively in line with the upward pressure on lending rates since the tightening of the monetary policy and build-up of economic pressures began since the second half of last year. 

“The Monetary Board also decided to remove caps imposed on lending interest rates applicable to credit cards, pre-arranged temporary overdrafts, and pawning facilities to facilitate the effective transmission of the policy adjustment,” the monetary policy statement issued on Saturday said. 

The Central Bank hiked its overnight lending rate by an unprecedented 700 basis points on Friday to signal the market that it wasn’t shy to take corrective actions to cool down the economy and thereby lessen external sector pressures. The action could however inflict immediate to short-term economic pain on businesses and households alike as it could push lending rates to over 20 percent levels. With the removal of the ceiling, credit card interest rates are expected to increase to nearly 40 percent, an exponential level the country hasn’t seen since at least a decade. The sharp increase in rates would send tremors across both stock markets and in the main street as many commodities will become out of reach for many as cost of production will go through the roof and force manufacturers to scale down production. 

However, the newly appointed Governor, Dr. Nandalal Weerasinghe said a shock treatment such as this was the need of the hour to tackle the burning issues in the economy. 

“Think of the positive side of hiking interest rates. Higher rates would address excess demand and thereby the widening deficit in the Balance of Payment, tackle arbitrage opportunity available for long in the interest rates market, and make possible for the government to finance fiscal deficit from the market,” he said.

However, the fallout of the aggressive monetary tightening could be felt in the banking and financial markets by way of massive scale defaults.

While some amount of monetary tightening may be required, a section of economic analysts are skeptical as to how any aggressive monetary policy moves could address supply side price pressures, over which the Monetary Board does not have any control. 

The Reserve Bank of India on Friday left its repurchase rate, the rate it uses to provide liquidity to lenders unchanged at 4.0 percent, but upped its inflation expectation for the medium term while forecasting oil at US$ 100 a barrel in the April-September period, up from the earlier US$ 75 assumption.