With the hike in RBIs lending rates to bank of 25% i.e.0.25% in key rates, it is expected to see the hike in the rates at which loans are lent to corporates and individuals. Since the cost of acquiring funds by the banks go up, this will be passed on to borrowers who will have to pay a higher rate of interest in order to purchase a home loan, car loan etc. But given the hope that the rates will not rise immediately according to Deepak Parekh, chairman of the largest home loan provider HDFC, which currently lends home loans at the rate of 9.5-10%. Depending on the government spending and demand for credit, it is important to observe the rise in deposits and liquidity conditions.
The reference rates for home loans are at 8-9% currently and 13-17% for prime lending rates. Banks such as SBI pay out 9.5% for 1000 day deposits. But a hike is expected in the coming months by RBI which will result in a hike in the banks lending rates. A repo rate of 7.25-7.50% from 6.50% is expected according to Indranil Pan, chief economist at Kotak Mahindra Bank while Sonal Varma, economist at Nomura, expects a hike of 25 bps in the March policy review and 50 bps by the first half of the next fiscal year (FY12).
But there is also a downside if the deposit grow. In such a scenario, banks will hike the deposit rates whose burden will be passed on to the borrowers. Which means the lending rates will also shoot up. But since the rates are already quite high, most banks will not increase the rates at which they lend. But the treasury head of a large commercial bank feels that in the fourth quarter interest rates on deposits are likely to rise since banks will find it hard to achieve their target of mobilizing their deposits. So it is expected that banks will show some aggressiveness towards mobilizing funds with two months remaining for this fiscal year.
With the credit growth of 16% and increase in the deposits of 10.7% in the first nine months of this fiscal year, there could be a moderate hike in retail deposit rates and of the interest rates on bulk deposits and certificates of deposits are expected to rise.