Rate-cut hopes move to next year

Despite Reserve Bank of India (RBI) holding on to the policy interest rates, home and auto loan rates are likely to come down as banks continue to push retail loans to pep up demand.

This is despite RBI raising "concerns" over banks' over-ambitious plans to step up retail lending.

Banks are also likely to bring down deposit rates further to keep their funding cost lower so that lending rates can ease.

On Tuesday, the RBI governor Raghuram Rajan told companies to bring down their debt levels so that banks have more elbow room to bring down interest rates. The central bank, in its fifth bi-monthly monetary policy unveiled on Tuesday, hinted at a reversal in interest rates by early 2015 if inflation continues to soften at the same pace. It kept the rate at which it lends to banks (called repo rate in banking parlance) at 8% and the quantum of deposits that banks keep with RBI (called cash reserve ratio or CRR) at 4%.

Bankers say interest rates are already coming down across various products with banks decreasing the premiums — such as risk premiums or tenor premiums on loans. Despite intense political pressures and shrill calls from the industry to bring down interest rates, RBI kept rates unchanged holding its ground as uncertainties continue to shadow the current fall in inflation with possibilities of oil prices reversing its downward trend and food prices climbing up once the supplies fall in summer.

Rajan said in a press conference post the policy announcement that the interest rates in the system are already down. "The interest rates on government securities are falling but banks are not cutting rates due to the quantum of bad loans. Industry needs to repay their loans so that banks can bring down interest rates. Though RBI has not cut rates, monetary easing is already happening and banks should be lending at lower rates."

"But I cannot tell banks what to do, they need to take a call," said Rajan.

Bankers say that interest rate momentum is certainly inching downwards and that select products like home loans and car loans may see some easing of rates in the coming months. Though banks may not revise base rate until the RBI cuts the rate at which it lends to banks, they will bring down the premiums they charge effectively bring down the borrowing costs.

Arundhati Bhattacharya, chairman, State Bank of India, told dna, "Lending rates on car and home loans may glide downwards in the coming month. Already banks are bringing down rates in select categories by decreasing the risk premiums without really changing the rates. So lending rates are already going down. But the demand for credit continues to be muted, so banks are not yet in a position to reduce their base rate as it may impact their bottomline but consumers can expect lower rates in select products depending on the focus of the bank."

On its part, RBI has raised a red flag over banks' plans for retail lending. "Deputy governor SS Mundra and I have cautioned banks on more than one occasion to show some restraint on retail lending. It should not be seen as a new panacea," said Rajan. He said there should be a balance between corporate and retail credit.

With project-related investments coming to a standstill, banks have been pushing retail lending like home loans, auto loans and unsecured credit to drive margins.

According to RBI data, the year-on-year growth of retail loans has been the highest at 16.3% with an outstanding of Rs 11,28,100 crore. But until corporate credit picks up, banks have no option but to grow the retail loans.

RBI said, "A change in the monetary policy stance at the current juncture is premature. However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle."

Parthasarathi Mukherjee, president, large corporates and international banking at Axis Bank, told dna, "Lending rates will come down as the cost of funds dipped for banks and it continues to go down. This will translate into cheaper lending rates. We have cut our base rate just a month ago by 10 basis points to 10.15% and we may move it down further depending on the cost of funds."

Retail inflation eased in to a three-year low of 5.52% in October, below the central bank's target of 6% by 2016.India's wholesale inflation rate — the main gauge to capture country-wide price movements — has also plunged to a five-year low of 1.77% in October, triggering a chorus of demand for lower borrowing costs to boost investment and consumer spending.

Rana Kapoor, MD & CEO, YES Bank, said in a statement, "I see space for monetary accommodation to the tune of close to 100 bps cut over the course of next 12 months."