EMIs set to jump 50-75 bps beyond September

Loan equated monthly installments, or EMIs, are seen rising by 50-75 basis points after September on the back of further increase in key policy rates by the Reserve Bank of India (RBI).

Going by analysts, chances of a hike in lending rates are lesser in the first half of the new financial year.

“I don’t think the lending rates will see a hike for the next six months. Post-September, possibly, a 50 basis points hike can be expected,” said Suresh Ganapathy, head of financial research team, Macquarie Securities.

Indranil Sen Gupta and Rudy Loo-Kung of Bank of America-Merrill Lynch said in a report released earlier this week that excess loan demand should push up lending rates 75 basis points in the October 2011 to March 2012 busy season. Sen Gupta and Loo-Jung expect the RBI to resort to a further hike of 75 basis points.

Alongside hiking lending rates in the second half, the banks, which are reeling under the burden of high deposit rates, are expected to resort to cutting deposit rates to protect their margins. So far this fiscal, retail deposit rates have been hiked in the range of 250-300 basis points, while bulk deposit rates were hiked 400-450 basis points.

“We feel that the retail deposit rates will stay firm for the first half of the next fiscal, and later, from October, the (deposit) rates should start coming off,” said Vinay Chhoda, senior research analyst, Jaypee Capital Services.

But what makes these analysts assume rates won’t go up in the first half of the fiscal?
According to Ganapathy, credit growth is expected to be pretty low in the first half due to which banks will refrain from hiking lending rates at that time. “This leaves no incentives for the banks to increase their lending rates in the first half.”

As such, the high lending rates have started hurting loan demand. In FY11 banks have raised lending rates by 150-200 basis points. This was because in FY11 the RBI has hiked rates seven times. “Any further increase in lending rates will impact demand. It is already happening in home loans. We are witnessing flattening of the demand curve. The next segment would be car loan. Both, the increase in car prices and increase in the lending rate, should dampen the demand,” said Harsh Roongta, chief executive officer, Apnapaisa.com.