Good news for borrower’s interest rates on home and consumer loans may decline

Borrowers can find some relief in the New Year as interest rates on home and consumer loans could decline from the second quarter onward. According to bankers and economists’ high fuel and food prices might killjoy by putting pressure on inflation.

Experts are of a view that the interest rates have peaked and with deposit rates on the decline, consumers can see moderation in interest rates in 2008 because of the cautious stand taken by the Reserve Bank of India for almost the whole of last year, had managed to keep inflation low without disrupting economic growth.

“Our margins were a bit strained during the year but now banks have begun reducing deposit rates. With RBI’s objective to keep inflation close to three per cent in the medium term, interest rates are bound to come down,” Union Bank of India Chairman and Managing Director M V Nair said.

Rana Kapoor, managing director & CEO, Yes Bank, also feel that a 0.5 per cent reduction in interest rates was in the offing.

“We see no decline in interest rates in the next three months. RBI is not likely to reduce rates in January but in the next financial year starting April, there could be a reduction of half a per cent,” he said. Reserve Bank had raised key interest rates six times in the past year-and-a-half. The central bank also raised banks’ mandatory cash deposits or Cash Reserve Ratio (CRR) by 2.5 per cent as from December 2006 to 7.5 per cent for tightening liquidity as part of steps to keep inflation within limits.

Banks also raised interest rates on home, vehicle and personal loans in line with these measures. Currently floating home loan interest rates range from 10-11.5 per cent, while fixed rates are two-three percentage points higher. The India chief of ABN Amro Bank, Meera H Sanyal, also supported the view and said there could be a small decline in rates. She said the inflation based on wholesale prices will remain within the RBI’s comfort zone of below 5 per cent.

But some of them feel that inflation, which touched 3.45 per cent for the week ended December 15, can accelerate if the government allows state oil firms to raise prices of petrol, diesel, cooking gas and kerosene. Further increase in prices of food products such as wheat and edible oils will also put pressure on inflation. In such a scenario, RBI might keep up its tight monetary stance this year as well.

“Consumers are unlikely to get any relief in the near future as there is little chance of interest rates coming down due to high inflationary expectations,” HDFC Bank chief economist Abheek Barua said last week.

According to him fuel and food prices remain are the key concerns, adding to this revision in oil prices can push inflation beyond 4 per cent.

In 2007 international crude oil prices almost doubled from the year’s low to come within striking distance of 100 dollars a barrel. India imports nearly three-fourth of its crude oil needs, however, the government has not allowed state-run marketing firms to raise retail prices so far. With elections in politically sensitive state of Gujarat is over, it is expected that UPA Government might raise fuel prices this month.

Bankers are of view that the Reserve Bank’s monetary tightening measures has brought down credit off taking to around 25 per cent from more than 30 per cent a year ago. Apart from inflation, these measures were also aimed at preventing overheating of some sectors such as housing by limiting credit supply.

“The overall growth in credit was good. It was low compared to 2006, but on a long term average, credit offtake of 23-25 per cent (in 2007) was still good,” Union Bank’s Nair said.