The anomaly in India’s interest rate structure3 min read . Updated: 04 May 2022, 05:54 AM IST
- When RBI commences a hike in interest rates, the anomaly will start reducing
When you see commercial ads screaming at you, offering home loans at 6.5%, the rate seems lower than earlier. Good for borrowers, you would say. Yes, it is. But think of the overall interest rate structure prevailing in the country. When you place a 10-year deposit with the State Bank of India (SBI), you get a rate of 5.5%. It means the leading bank is borrowing money for 10 years at 5.5%. When you are borrowing for 10 years at 6.5% even with the security of your home as a mortgage, the rate is obviously higher than 5.5%. It may seem like stating the obvious, but you and I are not the SBI and have to pay more for borrowing money. State governments are raising money in primary issuances at approximately 7.2% - 7.3%, and the 10-year yield in the secondary market for central government securities, the highest credit quality instrument in the country, is approximately 7.15%. This means that the central government is borrowing money at approximately 7.15% for 10 years. And that is the anomaly. You and I are borrowing at 6.5% and the highest authorities in the country are borrowing at 7.15% or 7.25%. The basic premise of economics is, better the profile, lower the borrowing cost and vice versa.