Falling commodity prices, especially of crude and metals, a stable currency, rising exports coupled with a market awash with global liquidity and a possible Moody's upgrade on India are all pointing towards a softer rate regime possibly as early as December.
"It does not matter whether the Reserve Bank cuts key repo rate or not. That's not the ultimate or the rate at which banks get funded. The fact is liquidity has increased and corporates are able to raise short-term funds at least 20-30 bps lower," said a treasurer at a private bank.
Secondary market yields of long-term government bonds have been steadily declining in the last six months. From a high of 8.8%, ten-year bond yields have eased to 8.27% on Friday. In the last three weeks, yields have dropped by 8 basis points.
This has led to many banks cutting home loan rates though their base rates remain unchanged.
In a way banks have lowered long-term rates without the Reserve Bank of India changing the key repo rate which remains a constant 8%.
Home loan rates now average 10% though a few banks continue with their earlier rates of 11.25%-11.75%.
State Bank of India, the country's largest government bank has a rate that range between 10.10 and 10.25% while a few private sector banks charge 10% floating rates. "Ours is now almost the same as base rate," said an SBI official.
Some banks are even offering fixed home loan rate of 10.5% indicating that the easing trend were more likely sustainable.
"Consistently falling prices of global crude and metals are exerting a downward pressure on inflation and increasing the possibility of a rate cut," said K Harihar, treasury head at FirstRand Bank.
The economy seems to be moving on track with exports in September showing a spurt at $28,903 million when compared with the previous month's $26,958 million. Year on year, the rise was 2.73%.
The consumer price index is at its record low of 6.46% as against the previous month's 7.7%, while the wholesale price index was at a five-year low of 2.38% (3.74%).
"Large capital infusion by Bank of Japan, European Central Bank and People's Bank of China are increasing the case for a rate cut," said Harihar.
Foreign institutional fund-flows into the domestic equity and debt markets since the beginning April now stands at Rs 98,102.52 crore. Their outlook for India has turned positive from the negative sentiment in the previous fiscal year where they were net sellers to the tune of Rs 27, 892.20 crore.
Bankers are, however, not sure when the RBI could begin slashing rates. Given Moody's likelihood of an upgrade, the conservative time-frame expected by many bankers on when RBI could lower rates is seen around the new fiscal year.
"The report card show-cased by the government while presenting the budget for the new fiscal, will pave the way for a rate-cut," said a senior government banker.
According to the banker, the performance of the government will be adjudged in terms of achievements on the fiscal deficit front. "Even though crude prices have fallen 25% since June to $85 a barrel (brent crude), the import volumes have not increased, thanks to the industrial slowdown. We need to see if the government can keep the fiscal deficit at the targeted 4.1% of the GDP," he added.
Index for Industrial Production (IIP) has fallen from 4.7% in May this year to 0.4% in August which was largely due to slowdown in manufacturing and capital goods activity.
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