Home, auto loan rate to cut down with cut in interest rate

Alarming state of the US economic slowdown on Tuesday forced a cut of 0.75 in the interest rate, there is growing conjecture that the Reserve Bank of India (RBI) will also follow the same line.

If that happens, over the next two quarters one can see a cut in retail loan rates, including home loans, by 0.25-0.5 per cent. Floating rate home loans of the three major lenders HDFC, SBI and ICICI Bank are between 10.25 per cent and 10.5 per cent.

On Tuesday RBI is scheduled to announce its quarterly monetary policy. It would be under pressure as the Federal Reserve (the Fed) rate cut has broadened the differential between US and Indian rates to 4.25 per cent. (The Indian repo rate, the rate at which the RBI lends to banks, is 7.75 per cent, while the US Fed’s overnight rate is 3.5 per cent).

On seeing this kind of differential, it will make sense for foreign players to borrow in the US and lend in India to make money on the spread. The RBI would not want that, for the arrival of an overflow of dollars would make the rupee stronger, reducing our ability to export.

If the RBI cuts rates, then the retail rates will get cheaper. On January 4, finance minister Palaniappan Chidambaram had asked banks to lower lending rates by 50 basis points (100 basis points make 1 per cent). Although bankers feel there is scope for retail loans to move southwards.

“Home loans are expected to come down this year by at least 0.5 per cent as we expect the central bank to slash key interest rates by 0.25 per cent during the monetary policy review,” said Harpreet Singh, business director for wealth management and distribution of loans with Centurion Bank of Punjab (CBoP).

OP Bhatt, managing director of State Bank of India, said rates could be cut, but did not want to commit himself to a specific rate. “To cut rates would be the intention, but there is no one-to-one correlation between RBI rate cuts and consumer rates. I can’t say how much rates will come down,” Bhatt said, speaking on the sidelines of a conference in Mumbai.

Unlike CBoP, Bhatt feelt that the RBI will hold its benchmark interest rates stable during the monetary policy. “It may not go up. It may remain the same. A rate cut in the US does not necessarily mean rates should be cut in India. Factors are different,” said Bhatt.

In the past 18 months the central bank has raised key interest rates six times. Since December, 2006 it has also raised banks’ cash reserve ratio (CRR) by 2.5 per cent to 7.5 per cent in order to suck out excess liquidity from the system and keep inflation within limits.

Rajiv Sabharwal, head of retail assets and rural finance at ICICI Bank, felt that there would not be any change in interest rates on retail loans as a whole during the current quarter, but a lot would depend on what the central bank would do.

“While we do not see a change in interest rates on loans for this quarter, it all depends on the regulator and the cost of funds,” Sabharwal added.

Discussing about auto loan rates specifically, CBoP’s Singh feels they will slide by good 50-100 basis points this year.

“While demand for car loans has been satisfactory, demand for two-wheeler loans is almost nil owing to high interest rates. If there is a decline in interest rates, we could expect some softening in auto loan rates this year. This will help a pick up in demand,” said Singh.