India experienced its hottest February in more than 120 years, which suggests that the upcoming months of 2023 will be much hotter. The surge in temperatures could have a significant impact on home loan borrowers. India Ratings, a domestic ratings agency, explained in a report that the record temperatures in February might cause the Reserve Bank of India (RBI) to increase rates in its April monetary policy.
The reason for this is that the rising temperatures could negatively impact wheat production and raise prices even further, with the surge in wheat prices being responsible for over 10% of retail inflation in December 2022 and January 2023. The India Meteorological Department declared that February 2023 was the hottest month in 122 years, and warned citizens to brace themselves for more heat waves in the future.
India Ratings also stated in its report, released before the IMD data, that the country would experience “terminal heat stress” again. Additionally, the maximum temperature in Punjab, a crucial wheat-growing region, was 4 to 5 degrees Celsius higher than the normal temperature between February 17-23, according to the ratings agency.
Impact of high temperatures on inflation
India Ratings warned that the predicted decrease in wheat production could cause a rise in inflation. The agency estimated that wheat output may decline to 107.7 million tonnes (MT) from the second advance estimate of 112.2 MT. This increase in inflation, particularly due to the surge in wheat prices, may lead to another rate hike by the Reserve Bank of India (RBI), which has already increased key rates by 25 basis points to 6.5 per cent. The RBI had previously stated that future monetary policy decisions would depend on inflation trends.
Rate hike in April likely
The upcoming policy review in April by RBI is anticipated to result in another 25 basis point hike in key rates, which could directly impact borrowing, particularly home loans. Since May 2022, housing loan EMIs have been consistently increasing, causing significant stress for borrowers. Those who initiated loans at approximately 6.5% interest rates are now paying more than 9%, considerably elevating their EMIs. This may escalate further if RBI decides to implement another rate hike after April.
Two factors are making the case for a rate hike in April stronger, according to reports. India Ratings has noted that the decline in wheat production and a possible uptick in vegetable prices due to rising costs will lead to an increase in inflation. The ratings agency added that core inflation has been persistent, making it conducive to another rate hike. Experts predict that there may be a rate hike in April before the possibility of a pause, as it will take at least two months for vegetable prices to stabilise after the onset of summer, and this period could be marked by higher inflation.
