Home, car loan rates may head southwards

Mumbai, India (Jan 24, 2008).  (SIFY):   With the looming US economic slowdown forcing an interest rate cut of 0.75 per cent on Tuesday, there is growing speculation that the Reserve Bank of India (RBI) will do the same shortly.

If that happens, one could see a slash in retail loan rates, including home loans, by 0.25-0.5 per cent, over the next two quarters. Floating rate home loans are between 10.25 per cent and 10.5 per cent for HDFC, SBI and ICICI Bank, the three major lenders.

The RBI is scheduled to announce its quarterly monetary policy next Tuesday. It will be under pressure as the Federal Reserve (the Fed) rate cut has widened the differential between US and Indian rates to 4.25 per cent. (The Indian repo rate, the rate at which the RBI lends to banks, is 7.75 per cent, while the US Fed’s overnight rate is 3.5 per cent).

With this kind of differential, it makes sense for foreign players to borrow in the US and lend in India to make money on the spread. The RBI would not want that, for the arrival of a deluge of dollars will make the rupee stronger, reducing our ability to export.

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If the RBI cuts rates, retail rates will get cheaper. On January 4, finance minister Palaniappan Chidambaram asked banks to lower lending rates by 50 basis points (100 basis points make 1 per cent). Bankers feel there is scope for retail loans to move southwards.

“Home loans are expected to come down this year by at least 0.5 per cent as we expect the central bank to slash key interest rates by 0.25 per cent during the monetary policy review,” said Harpreet Singh, business director for wealth management and distribution of loans with Centurion Bank of Punjab (CBoP).

OP Bhatt, managing director of State Bank of India, said rates could be cut, but did not want to commit himself to a specific rate. “To cut rates would be the intention, but there is no one-to-one correlation between RBI rate cuts and consumer rates. I can’t say how much rates will come down,” Bhatt said, speaking on the sidelines of a conference in Mumbai.

Unlike CBoP, Bhatt felt that the RBI would hold its benchmark interest rates steady during the monetary policy. “It may not go up. It may remain the same. A rate cut in the US does not necessarily mean rates should be cut in India. Factors are different,” said Bhatt.

The central bank has raised key interest rates six times in the past 18 months. It has also raised banks’ cash reserve ratio (CRR) by 2.5 per cent since December, 2006, to 7.5 per cent in order to suck out excess liquidity from the system and keep inflation within limits.

Rajiv Sabharwal, head of retail assets and rural finance at ICICI Bank, felt that there would not be any change in interest rates on retail loans as a whole during the current quarter, but a lot would depend on what the central bank would do.

“While we do not see a change in interest rates on loans for this quarter, it all depends on the regulator and the cost of funds,” Sabharwal added.

Talking about auto loan rates specifically, CBoP’s Singh feels they would slide by a good 50-100 basis points this year.

“While demand for car loans has been satisfactory, demand for two-wheeler loans is almost nil owing to high interest rates. If there is a decline in interest rates, we could expect some softening in auto loan rates this year. This will help a pick up in demand,” said Singh.
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