Would banks soon cut home loan rates?
Dec 08, 2014

Author: PersonalFN Content & Research Team

Impact Impact Indicator

These days, you must be busy buying New Year gifts for your friends, relatives and loved ones. After all, New Year brings a new ray of hope and the passing year leaves you with a lot of things to learn from. Although buying gifts for others gives you immense pleasure, it might put some strain on your finances if you are picking the expensive ones. Managing finances is a critical aspect of one's life nowadays. Most of people, especially, those leaving in bigger cities, are often burdened with sizeable loans taken for buying home. If rate of interest, under floating rate system goes down even by 0.5%, you may be able to save a hefty amount if size of your loan is high. Here's some good news for you if you are a borrower. Banks might cut borrowing rates soon.

Why so?
Recently, some of India's prominent banks such as SBI, Axis Bank and HDFC Bank have reduced interest rates on deposits in the range of 0.25% to 0.75% depending on the maturity of the deposit. Banks typically reduce rates on deposits on two occasions. One, when they have ample of cash to lend or when, they are confident enough about being able to raise deposits at lower rates, primarily due to lower inflation expectation and high liquidity in the system. Interest rates usually take into account expectation of inflation. Under present scenario, banks have adequate liquidity with them while credit growth has been lacklustre. In simple words, banks have money but are not lending it since the demand for credit at current rate of interest is low.

At the fifth bi-monthly monetary policy, RBI suggested that there may be a likely change in the policy stance early next year, including outside the policy review cycle. For now, RBI has maintained key policy rates unchanged. As stated by the apex bank, liquidity conditions improved in the Q2FY15 and trend seemed to be continuing in Q3FY15 as well. In Q1 of the current fiscal, daily average borrowing by banks under different liquidity windows including net fixed and variable rate, term and overnight repos and Marginal Standing Facility (MSF) stood at Rs 80,300 crore. This borrowing declined to Rs 70,600 crore on an average in Q2. And in the first two months of Q3 (i.e. in October and November) banks have borrowed about Rs 47,600 on an average.

What to expect?
Now that RBI has hinted at a probable rate cut early next year, banks are gearing up for the next round of growth. When RBI cuts key policy rates, it's an indication to banks for lowering the borrowing cost and allowing borrowers to take up loans cheap. Usually, lowering of monetary policy rate is considered a precursor to economic growth. The RBI has reaffirmed the 5.5% GDP estimates for the current fiscal while growth is expected to gradually pick up in 2015-16. For next quarter including one under progress, RBI expects Indian economy to grow better than that in Q2 and finally recording higher growth in Q4.

Looking at the current move of banks, it appears that, they are fairly confident about rate cut happening early next year. If RBI lowers rates in deed, banks might lower their benchmark rates as well, thereby allowing borrowers to borrow at lower cost.

PersonalFN believes this is a bold move by banks. But considering the fact that deposit growth has outpaced the credit growth so far, it may not lead to dire consequences, even if RBI doesn't cut rates, going forward. RBI has attached some conditions to lowering policy rates which include, downtrend in inflation should continue even in future, expectations of inflation remain lower and fiscal developments should be positive. Whether these conditions are met is something that remains to be seen now.

PersonalFN is of the view that if we see a rate cut interest rates on your loans may come down sooner or later. However, PersonalFN cautions you against utilising money you might save due to fall in the rates, on recreation and leisure. Instead, you should invest it wisely for the future use. If opted for, falling interest on loans may help you reduce the tenure of your loan repayment. Paying off your liabilities as soon as you can may give you enough time to focus on achieving your long term financial goals.