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Private banks hope to cut home loan rates

High liquidity and inflation remaining below 5% for 6 weeks in a row have raised banks’ hopes for a cut in home loan rates after the credit policy review on July 31, reports BS Srinivasalu Reddy.
Hindustan Times | By BS Srinivasalu Reddy, Mumbai
UPDATED ON JUL 23, 2007 05:15 AM IST

High liquidity and inflation remaining below 5 per cent for six weeks in a row have raised banks’ hopes for a cut in home loan rates after the credit policy review on July 31. But it is unlikely to be broad-based cut with public sector banks preferring to remain away from slashing rates. Private banks, which effected severe hikes over the last few months, however, may slash them.

The Reserve Bank of India (RBI), however, is not likely to signal reversal of upward trend in interest rates in the upcoming credit policy review on July 31, according to experts. The reversal in benchmark interest rates like reverse repo rate and repo rate could be seen only by the year-end, they say.

“Public sector banks have been quite considerate of home loan borrowers. We did not hike rates twice when private banks did so. So, PSU banks would not be in a position to slash rates much,” said MV Nair, CMD of Union Bank of India.

“If we (PSU banks) follow the policy of not participating in the hikes, and participating in slashing rates, our lending rates may tend to zero in a few years,” Nair added jovially.

The interest rate slashes by 0.25 per cent by some banks, of late, also had the trappings of a marketing pitch as they are offered only to the new customers. Thus, for many banks, existing loans serve as cash cows.

Economists are expecting the RBI to continue the pause it has initiated in April 2007 policy, for now.

“RBI will not signal a reversal in interest rate up-trend, which has reined in key monetary variables such as inflation, money supply and credit growth. A signal could nullify the effect of the good work done so far,” said Sachchidanand Shukla, Economist of Enam

However, banks would prefer a rate cut, given deposits are outpacing credit demand leading to call rates falling to around one per cent level. They expect that cut in rates will boost credit demand. “It is an awkward situation for banks. The resources raised at 9 per cent, they have to deploy at one per cent in the call market now,” said A Prasanna, Economist of ICICI Securities.

“They are expecting a signal from RBI on interest rate slash. But that is unlikely though the market rates indicate softening rate regime,” Prasanna added.

The yields of 10-year paper fell from 8.4 per cent in June 2006 to 7.8 now.

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