Interest rate hike: Banks in wait-and-watch mode-Business Standard
Home loan borrowers may see their EMIs increase, repo rate rise likely to increase cost of deposits for banks
Millions of existing floating rate home loan borrowers might see their equated monthly instalments (EMIs) increase in the wake of the Reserve Bank of India raising its repo rate by 25 basis points (bps).
However, in automobile and personal loans, only new borrowers are likely to have their rates go up; existing borrowers will not be impacted. At the same time, savers in fixed deposits and other fixed income products could see a rise in interest incomes. Yet, how soon this is passed on by banks to depositors remains to be seen.
The repo rate rise is expected to increase the cost of deposits for banks. Banks are already increasing their base rates, against which floating rate home loans are adjusted. Housing finance companies had already raised home loan rates marginally in the past two months.
Responding to RBI's annoucement, State Bank of India Chairman Pratip Chaudhuri said lending and deposit rates would go up in view of the festive season. However, other banks seem to be in a wait-and-watch mode.
K R Kamath, chairman and managing director (CMD) of Punjab National Bank and chairman of the Indian Banks' Association, feels it's too early to decide on whether banks will raise lending or deposit rates. "We need to wait and watch before we can take a call on lending rates. In case there is an increase in credit and if liquidity comes under pressure, then banks will have to increase rates."
"The Reserve Bank of India announcement today will have a net impact of a slight savings for banks, in the short term. So, overall, the impact will not be too adverse. The RBI move may not translate into a hike in base rate in the immediate future," says H S Upendra Kamath, the CMD of Vijaya Bank.
On Thursday, State Bank of India, the country's largest lender, had raised both its deposit and base rate, ahead of Friday's monetary policy review. It had raised its base rate by 10 bps to 9.8 per cent and deposit rates by 30-100 bps across maturities. The bank pays 6.5 per cent on a one-year deposit for amounts less than Rs 1 crore. A home loan up to Rs 30 lakh is available at 9.95 per cent and above Rs 30 lakh at 10.1 per cent. It had also raised the spreads on home and automobile loans by 30 bps.
Last month, private banks had raised their base rates. For instance, ICICI Bank, Axis Bank and YES Bank raised it by 25 bps each, to 10, 10.25 and 10.75 per cent, respectively. HDFC has decided to raise its retail prime lending rate, on which its adjustable rate home loans are benchmarked, by 25 bps to 16.65 per cent from Friday. Following the rate revision, it would offer housing loans up to Rs 30 lakh at 10.40 per cent and loans above Rs 30 lakh at 10.65 per cent.
The private lenders had also raised their deposit rates before the lending rate increases. ICICI had increased it by 50-75 bps, HDFC Bank by 100 bps, Axis Bank and YES Bank by 25-225 bps.
Savers can, however, heave a sigh of relief. Interest rates on fixed deposits are likely to go up by around 25 bps but not soon. Short-term debt funds are also expected to see a rise in yields in the immediate future. Investors could take advantage of these and lock-in at higher rates. Experts advise short-term debt funds or liquid funds, where the returns are higher.
The 10-year bond yield increased by 38 bps to 8.57 per cent since Thursday. Corporate bond yields are around 10.25 per cent.
Says Prateek Pant, director, products and services, at RBS Private Banking: "We believe that investing in short-term funds and accrual funds will help investors make capital gains in addition to the coupon rate."
However, in automobile and personal loans, only new borrowers are likely to have their rates go up; existing borrowers will not be impacted. At the same time, savers in fixed deposits and other fixed income products could see a rise in interest incomes. Yet, how soon this is passed on by banks to depositors remains to be seen.
The repo rate rise is expected to increase the cost of deposits for banks. Banks are already increasing their base rates, against which floating rate home loans are adjusted. Housing finance companies had already raised home loan rates marginally in the past two months.
Responding to RBI's annoucement, State Bank of India Chairman Pratip Chaudhuri said lending and deposit rates would go up in view of the festive season. However, other banks seem to be in a wait-and-watch mode.
K R Kamath, chairman and managing director (CMD) of Punjab National Bank and chairman of the Indian Banks' Association, feels it's too early to decide on whether banks will raise lending or deposit rates. "We need to wait and watch before we can take a call on lending rates. In case there is an increase in credit and if liquidity comes under pressure, then banks will have to increase rates."
"The Reserve Bank of India announcement today will have a net impact of a slight savings for banks, in the short term. So, overall, the impact will not be too adverse. The RBI move may not translate into a hike in base rate in the immediate future," says H S Upendra Kamath, the CMD of Vijaya Bank.
On Thursday, State Bank of India, the country's largest lender, had raised both its deposit and base rate, ahead of Friday's monetary policy review. It had raised its base rate by 10 bps to 9.8 per cent and deposit rates by 30-100 bps across maturities. The bank pays 6.5 per cent on a one-year deposit for amounts less than Rs 1 crore. A home loan up to Rs 30 lakh is available at 9.95 per cent and above Rs 30 lakh at 10.1 per cent. It had also raised the spreads on home and automobile loans by 30 bps.
Last month, private banks had raised their base rates. For instance, ICICI Bank, Axis Bank and YES Bank raised it by 25 bps each, to 10, 10.25 and 10.75 per cent, respectively. HDFC has decided to raise its retail prime lending rate, on which its adjustable rate home loans are benchmarked, by 25 bps to 16.65 per cent from Friday. Following the rate revision, it would offer housing loans up to Rs 30 lakh at 10.40 per cent and loans above Rs 30 lakh at 10.65 per cent.
The private lenders had also raised their deposit rates before the lending rate increases. ICICI had increased it by 50-75 bps, HDFC Bank by 100 bps, Axis Bank and YES Bank by 25-225 bps.
Savers can, however, heave a sigh of relief. Interest rates on fixed deposits are likely to go up by around 25 bps but not soon. Short-term debt funds are also expected to see a rise in yields in the immediate future. Investors could take advantage of these and lock-in at higher rates. Experts advise short-term debt funds or liquid funds, where the returns are higher.
The 10-year bond yield increased by 38 bps to 8.57 per cent since Thursday. Corporate bond yields are around 10.25 per cent.
Says Prateek Pant, director, products and services, at RBS Private Banking: "We believe that investing in short-term funds and accrual funds will help investors make capital gains in addition to the coupon rate."
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