The New Year is likely to bring in good news for borrowers as interest rates on home and consumer loans could decline from the second quarter onward, but high fuel and food prices might play spoilsport by putting pressure on inflation, bankers and economists feel.
Experts feel that interest rates have peaked and with deposit rates on the decline, consumers could see softening of interest rates in 2008 as the prudent stance of Reserve Bank for almost the whole of last year managed to keep inflation low without disrupting economic growth.
"Our margins were a bit strained during the year but now banks have begun reducing deposit rates. With RBI's objective to keep inflation close to three per cent in the medium term, interest rates are bound to come down," Union Bank of India Chairman and Managing Director M V Nair told PTI.
Yes Bank Managing Director & CEO Rana Kapoor also felt a 0.5 per cent reduction in interest rates was in the offing.
"We see no decline in interest rates in the next three months. RBI is not likely to reduce rates in January but in the next fiscal starting April, there could be a reduction of half a per cent," he said.
Reserve Bank has raised key interest rates six times in the past year-and-a-half. It has also raised banks' mandatory cash deposits or Cash Reserve Ratio by 2.5 per cent since December 2006 to 7.5 per cent for tightening liquidity as part of steps to keep inflation within limits.
Banks also raised interest rates on home, vehicle and personal loans in line with these measures. At present, floating home loan interest rates range from 10-11.5 per cent, while fixed rates are two-three percentage points higher.
The India chief of ABN Amro Bank, Meera H Sanyal, also echoed the view and said there could be a small decline in rates. Inflation based on wholesale prices would remain within the RBI's comfort zone of below five per cent, she said.
However, some others felt that inflation, which touched 3.45 per cent for the week ended December 15, could accelerate if the government allows state oil firms to raise prices of petrol, diesel, cooking gas and kerosene. Besides, high prices of food products such as wheat and edible oils could also put pressure on inflation. In such a scenario, RBI may keep up its tight monetary stance this year as well.
"Consumers are unlikely to get any relief in the near future as there is little chance of interest rates coming down due to high inflationary expectations," HDFC Bank chief economist Abheek Barua said last week.
Fuel and food prices remain key concerns, he said, adding that a revision in oil prices can push inflation beyond 4 per cent.
International crude oil prices almost doubled in 2007 from the year's low to come within striking distance of 100 dollars a barrel. India imports nearly three-fourth of its crude oil needs, but the government has not allowed state-run marketing firms to raise retail prices so far. With elections in politically sensitive state of Gujarat over, the UPA Government is widely expected to raise fuel prices this month.
Bankers also said Reserve Bank's monetary tightening measures brought down credit offtake to around 25 per cent from more than 30 per cent a year ago. Besides inflation, these measures were also aimed at preventing overheating of some sectors such as housing by limiting credit supply.
"The overall growth in credit was good. It was low compared to 2006, but on a long term average, credit offtake of 23-25 per cent (in 2007) was still good," Union Bank's Nair said.