Mumbai: Interest rates are nearing their peaks and the new fiscal year may even see a fall in the loan rates of banks in the second half, bankers and analysts say.
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This is even as economists are predicting there could be another hike of 50-75 basis points (bps) in policy rates by the Indian central bank between now and December. One basis point is one-hundredth of a percentage point.
A majority of bankers say it may not be convenient for them to pass on the rate hikes to customers.
They argue that in the interim, the liquidity situation will improve and cost of funds for banks will come down. The first half of any fiscal year is traditionally the lean period for companies and they do not rush to raise loans from banks.
The execution of annual plans typically take place at the start of the second half and credit demand picks up. The cost of resources goes up with rising demand for money and banks raise rates.
To avoid any crowding out, the government also completes at least 60% of its annual borrowing programme in the first half of every fiscal year.
“There is a resistance in the system against further rise in lending rates, as it may hurt the demand, and thereby, slow down credit growth,” said K.R. Kamath, chairman and managing director of Punjab National Bank.
By the second half of the fiscal, even as credit growth picks up, overall interest rates are expected to come down due to a fall in inflation. The Reserve Bank of India (RBI) may not have to resort to aggressive rate hikes and bankers expect the rates to stabilize. It may even fall, they say.
“Interest rates are likely to stabilize in the first part of fiscal 2012 and may start coming down towards the end of the year. This is also due to an expected easing in the inflation,” Kamath said.
Fearing a slump in credit demand, banks had deterred from raising their loan rates this time after RBI hiked its key policy rates by 25 bps on 17 March.
“It is a bit tough to say now about the interest rate movement. Overall, the bias was of interest rates hardening in the past few months. But I don’t see rates to pick up in the immediate future,” said M.D. Mallya, head of Bank of Baroda. “We will have to take a call what RBI does in May and then look at other factors such as liquidity and credit demand before taking a call.”
United Bank of India chairman Bhaskar Sen also holds a similar view. At a recent press meet, he said interest rates may not go up in the near term.
However, not every banker shares the same enthusiasm about rates stabilizing or going down.
“Our internal assessment suggests policy rates would go up by 50 basis points more. We feel around 25-50 basis points of absorption capacity is still there with the industry,” said M.V. Nair, chairman and managing director of Union Bank of India.
Deposit rates are highly unlikely to go up in the same quantum as lending rates, Nair added. This is because deposit rates in the past few months have been raised much more than the lending rates.
Nair did not want to comment on the timing of the rate hike.
Soon after the 0.25% rate hike by RBI on 17 March, Canara Bank had said it may have to pass on the hike to the customers as cost of deposits have increased significantly in the past three months. It has not hiked its loan rate as yet.
Since March 2010, RBI has hiked its policy rate by 350 bps. During this period, banks have raised their lending rates by about 200 bsp. Deposit rates, on the contrary, have risen by about 25-50 bsp more, putting pressure on banks’ margins.
Some banks had also floated special deposit schemes to customers where they were offering an annual interest of as much as 9.5% for a 555-day deposit.
State Bank of India chairman O.P. Bhatt blamed it on faulty transmission mechanism. “That is because the transmission mechanism is not perfect in this country. We don’t have a market-determined deposit market,” Bhatt said in his interaction with the media on Wednesday.
On an earlier occasion, Bhatt had said interest rates have little room to go up from this point.
Some banking analysts see rates to have peaked and the probability of lending rates rising further, at least in the next three-four months, is relatively low. Relatively easy liquidity condition in the market is also expected to provide comfort to banks from upping rates further, they said.
“Lending rates have peaked in the banking system. Rates are likely to stay where they are at least in the next three-four months. Banks may thereafter take call to reduce the rates on bulk deposits also due to their declining cost of funds,” said Vaibhav Agarwal, vice-president of research at Angel Broking Ltd. “It is difficult to predict how soon the decline in lending rates will happen.”
According to him, the overall liquidity situation in the system is likely to improve in the months ahead due to the fact that long-term funds, primarily insurance funds, are coming into the market. This may help banks maintain a deposit growth of 17-18% in the next fiscal year and credit growth of 18-20%.
Given the continuing inflationary pressures, RBI is expected to hike the key rate by another 25 bsp in the next monetary policy review in May. After this, the trajectory of inflation will determine the monetary stance of the Indian central bank.
Incidentally, in fiscal 2011, RBI raised its inflation projection twice from 5.5% to 8%.
Photo by Adeel Halim/Bloomberg; Graphic by Ahmed Raza Khan/Mint