The year 2014, was uneventful in the loan market, as there were no significant rate change announcements made by the RBI, leaving customers high and dry. As the RBI’s quarterly policy review for 2015 is nearing, hopes are high for borrowers and would-be borrowers. As we gaze into the future, here are some predictions on the direction bank interest rates are likely to take.
The Repo Rate Tarot Cards: The Reserve Bank of India has always been under the spotlight when it comes to repo rates. Repo rate is essentially the interest rate at which the RBI lends money to various banks. Any increase in repo rate usually impacts the interest rates offered by the banks. Banks move their base rate in accordance with the repo rate announced by the RBI.
The year 2015 has been good for the Indian banking industry since the Reserve Bank of India has cut interest rates by 0.5 per cent in two cuts less than three months apart from January to March. Ironically, banks have not passed on the rate cuts to their borrowers in the form of lower interest rates, forcing them to wait for the next policy review due in April 2015.
This is not the first time when banks have not passed on the rate cut benefits to loan seekers. Often in the past, banks have offered reduced interest rates only for new borrowers. Far from using this as a marketing device to lure new loan applicants, banks have their own reasons for such a mechanism, as they tend to keep their base rates unchanged but reduce their spreads instead.
The Inflation Horoscope: Inflation plays a very significant role in measuring the overall health of the economy. Whenever inflation rises, the RBI is forced to keep the repo rates high to maintain a balance.
Inflation peaked throughout most of 2014, resulting in virtually no drop in repo rates for almost a full year. With the inflation in harness now, repo rate cuts were announced twice this year, much to the initial delight of borrowers. Unfortunately, the retail inflation seems to have risen slightly to 5.37 per cent in February. The numbers are up from 5.19 per cent in January and 5 per cent in December last year. Inflationary increases tend to dampen the likelihood of the RBI reducing the repo rates in the near term, and consequently any drop in bank interest rates would seem unlikely in the near future unless there is a fresh impetus from the RBI.
The government’s Magic Wand: The RBI on its part seems to have done the maximum it can do to facilitate lowering of interest rates but banks have been so far reluctant in offering the rate cut to consumers. The finance minister has also urged public sector banks to pass on the benefits to consumers. However, with inflation having risen again in the month of February, chances of a further repo rate cut look slim which may have just put the brakes on any momentum building towards interest rate cuts for borrowers.
The Yes-No-Wait Crystal Ball for New Loan Borrowers: If you are a potential loan borrower and waiting for the interest rates to go south, you may have to wait a while. Unless inflation gets tamed and the RBI offers another repo rate cut in its next policy review meet, banks are unlikely to bring down their interest rates just as yet.
Equally, it would be incorrect to surmise that banks do not want to offer a lower rate of interest as that would benefit them. But banks gain as the value of their bond portfolio rises. They are however are unlikely to take a call unless it is absolutely necessary on a long term prospect.
The writing on the wall: So our financial crystal ball, tarot cards, numerology predictions and horoscope all point to the fact that interest rates are likely to remain flat in the near future, with only slim chances of a substantial drop.
Keeping in mind the hiking real estate prices, there is no point in new borrowers continuing with their ‘wait and watch’ stance. By choosing a floating rate of interest, and with more transparency in fixing the rates, borrowers can always take the advantage of lesser rates when it comes. Moreover, once the rates are down, there is always an option to switch to a fixed rate and stay locked on to a lower rate.
Any borrower would like to enter into a bank loan agreement when the interest rates are down and stay away from taking loans when the interest rates are heating up. Unfortunately, the pendulum of interest rate changes can swing at more than one speed and in more than one direction, making it difficult for loan borrowers to time their home loan entry right. Timely monitoring of policy moves of the RBI and the leading banking institutions can help time your own swing in the right direction.
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