Tightening Belts: Families Grapple with Rising Loan EMIs and Stubborn Food Inflation

New Delhi, October 27, 2023 – Indian families are bracing for a double whammy this week as the ripple effects of the Reserve Bank of India’s (RBI) cautious monetary policy stance translate into higher loan EMIs, even as persistent food inflation continues its relentless assault on household budgets, making daily essentials costlier and significantly squeezing discretionary spending.

The combined impact signals a challenging festive season ahead, forcing millions to tighten their financial belts.

Key points

* Major banks have begun adjusting their lending rates upwards, increasing the burden of Equated Monthly Installments (EMIs) for existing and new borrowers.

* Despite some seasonal moderation, food inflation, particularly for vegetables, pulses, and spices, remains a significant concern, directly impacting kitchen expenses.

* Economists predict that the sustained pressure on household finances will likely dampen consumer sentiment and restrict non-essential purchases.

* The government is exploring targeted interventions to stabilise prices of specific commodities, but a broader relief from inflationary pressures seems distant for now.

The latest review by the RBI’s Monetary Policy Committee (MPC) earlier this month, while holding the benchmark repo rate steady at 6.5%, signalled a firm resolve to keep inflation within its target band of 4% (+/- 2%).

This hawkish ‘withdrawal of accommodation’ stance, focused on ensuring that inflation aligns with the target while supporting growth, has prompted major commercial banks to reassess their lending rates.

Several public and private sector banks, including State Bank of India, HDFC Bank, and ICICI Bank, have incrementally raised their Marginal Cost of Funds-based Lending Rate (MCLR) or external benchmark-linked rates (EBLR) by 5-10 basis points across various tenors.

For an average home loan of ₹50 lakh over 20 years, even a 10 basis point increase could mean an additional ₹300-500 in monthly EMI, cumulatively adding thousands over the loan tenure.

Concurrently, the shadow of food inflation looms large.

The Consumer Price Index (CPI) data released recently showed retail inflation marginally easing to 5.02% in September from 6.83% in August.

However, food inflation, though decelerating, remained elevated at 6.56%, notably higher than the headline figure.

Within the food basket, vegetables, pulses, and spices continued to exhibit significant price volatility and upward trends.

Tomatoes, onions, and potatoes, staple items in Indian kitchens, have seen price surges in certain regions due to erratic monsoon patterns and supply chain disruptions.

Pulses, especially tur and urad dal, have witnessed a consistent upward trajectory, primarily due to lower domestic production estimates and global price movements.

Edible oils, after a period of stability, are also showing signs of renewed price pressure.

This combination of higher credit costs and expensive groceries means less disposable income for families.

Many households, particularly in the middle-income segment, are finding their carefully planned budgets stretched thin. "We are seeing a noticeable shift in spending habits," noted a senior official from a prominent retail chain in Mumbai. "Customers are increasingly opting for smaller pack sizes, delaying big-ticket purchases, and scrutinizing every expense.

The festive rush, while present, isn't translating into the kind of discretionary spending we'd typically anticipate."

Dr.

Sanjiv Kapoor, Chief Economist at Pragati Institute of Economic Research, weighed in, stating, "The RBI's decision to maintain the repo rate but sustain its hawkish stance indicates that the battle against inflation is far from over.

Banks are simply passing on their higher cost of funds, and this will inevitably translate into higher EMIs.

For families, this means less money for consumption, potentially slowing down economic growth in non-essential sectors."

Ms.

Anjali Sharma, Head of Retail Lending at Bharat Bank, elaborated on the banking perspective. "While the repo rate hasn't changed, the overall cost of funds for banks has been influenced by liquidity conditions and market expectations.

We have made minor adjustments to our lending rates to reflect these realities.

We understand this adds pressure on our customers, and we are advising them to review their budgets and consider pre-payment options where feasible."

Mr.

Rajesh Kumar, Secretary of the All India Consumer Rights Association, voiced the concerns of ordinary citizens. "Every rupee counts for the average Indian family.

When your home loan EMI goes up, and the price of your daily sabzi and dal also rises, it's a huge burden.

Families are cutting back on everything – entertainment, eating out, even children's extra-curricular activities.

This isn't just about numbers; it's about the quality of life."

A senior official within the Ministry of Finance, speaking on condition of anonymity, acknowledged the challenges. "The government is acutely aware of the impact of price rise on households.

We are actively monitoring global commodity trends and domestic supply chains.

Measures such as imposing stock limits on essential commodities, facilitating imports, and enhancing buffer stocks are continuously being reviewed and implemented to ensure stability, especially during the festive season."

Official data and numbers:

The latest CPI data for September 2023 showed headline inflation at 5.02%, a decrease from August's 6.83% but still above the RBI's comfort zone midpoint.

Food inflation, a major contributor, stood at 6.56%.

Within the food basket, prices of vegetables rose by 3.39% month-on-month, while pulses saw an increase of 13.14% year-on-year.

Specific examples include tur dal, which recorded a year-on-year inflation of over 20% in September.

The RBI's repo rate remains at 6.50% since February 2023.

However, the average increase in MCLR across major banks has been approximately 5-10 basis points in the past quarter, impacting millions of variable-rate loan holders.

The household debt-to-GDP ratio has also shown a gradual increase, underscoring the sensitivity of family finances to interest rate movements.

Background

India’s inflation trajectory has been volatile over the past two years, largely influenced by global supply chain disruptions, energy price surges, and adverse weather events impacting agricultural output.

The RBI initiated a series of rate hikes starting May 2022, cumulatively increasing the repo rate by 250 basis points to cool inflationary pressures.

While the headline inflation has eased from its peak, food inflation has remained stubbornly high due to erratic monsoons, unseasonal rains, and logistical challenges.

The government has attempted various measures, including export restrictions on rice, onion, and wheat, as well as import facilitation for pulses and edible oils, to manage domestic supplies and prices.

These interventions, while providing some relief, haven't entirely insulated consumers from the impact of market dynamics.

What it means

For the average Indian family, these economic shifts translate into tangible adjustments.

Existing home and auto loan borrowers will see slightly higher EMIs, potentially extending their loan tenures or increasing their monthly outflows.

New borrowers will face higher interest rates, impacting their affordability and borrowing capacity.

Simultaneously, the persistent rise in grocery bills means less money available for discretionary spending – be it for consumer durables, entertainment, education, or even healthcare.

This could lead to a slowdown in demand for non-essential goods and services, impacting various sectors of the economy.

Families are likely to re-prioritise expenses, focusing strictly on necessities, and postponing major purchases, potentially impacting savings goals for many.

Reactions

The common sentiment among salaried individuals and small business owners is one of growing frustration. "It feels like we are constantly running to stand still," remarked Kavita Singh, a private sector employee in Bengaluru. "Our salaries aren't keeping pace with these rising costs.

Every trip to the market or petrol pump feels like a pinch." Industry bodies, such as the Confederation of Indian Industry (CII), have expressed concern about the potential dampening effect on consumer demand, especially crucial during the upcoming festive season, urging both fiscal and monetary policy coordination to support growth without stoking inflation.

Political opposition parties have also seized upon the issue, criticising the government for what they term insufficient measures to control the price spiral impacting common citizens.

What happens next

All eyes will be on the monsoon's performance in its retreating phase and the winter crop sowing, which will significantly influence the trajectory of food prices in the coming months.

The RBI is expected to maintain its data-dependent approach, closely monitoring inflation and growth indicators before considering any future rate actions.

The government is likely to continue its targeted interventions, including managing buffer stocks and exploring trade policies to stabilise essential commodity prices.

Families, meanwhile, will need to continue prudent financial planning, exploring options like loan balance transfers or partial prepayments if their financial situation permits, to mitigate the impact of rising costs.

The outlook for the remainder of the fiscal year suggests a cautious approach to spending will be warranted for most households.