Interest rates on home loans could move up soon even as banks will continue to increase deposit rates.
Bankers said it is somewhat unreasonable to expect home loan rates to be at 6.4-6.5% when the benchmark yield is north of 7%. Though home loans are typically linked to the repo rate, which was left unchanged by the Reserve Bank of India (RBI) on Friday, interest rates in the system are now expected to rise in the next few months, with some economists expecting a repo rate hike as early as in June,
Ashwani Bhatia, managing director of State Bank of India, told a television channel that “a change in home loans could be coming soon.” According to Ashish Jain, MD, Star Housing Finance, home borrowers with floating rate loans should brace for increase in rate of interest, consequently resulting in either higher EMI or longer loan tenure. However, borrowers should consider the pros and cons of shifting to the fixed rate regime after careful consideration costs and industry offerings, he added.
Bankers said deposit rates will continue to rise. There has been an increase in rates for bulk deposits in the last few months but rates on retail deposits have gone up only marginally by 5 basis points or so. Market experts expect retail borrowers to benefit more soon.
The Reserve Bank of India on Friday signalled that the era of ultra-low interest rates could well be over, as the scales appear to be tipped in favour of fighting runaway price increases. While borrowers have benefited from low lending rates, depositors have seen their money grow at a slower pace than inflation, as real rates have remained in the negative territory for most part during the pandemic. As a result, investors have chased riskier assets like equities for better returns during this time period.
Experts said the change in the RBI’s tone will now help set the market’s expectations. Banks will look at raising both deposit and lending rates going forward, if the first rate hike comes by August. So far banks have been offering very attractive rates to borrowers as credit growth has been tepid during the pandemic. Competitive intensity has impacted margins of banks, particularly the state-owned ones, as rates remained low. With the RBI changing its stance, the rate cycle is effectively set to turn. Crisil Research is of the view that the change in tone and narrowing of the liquidity adjustment facility (LAF) corridor will prepare the markets for repo rate hikes. The rating agency expects hikes between 50 and 75 basis points in fiscal 2023, beginning with the June monetary policy review. The pace of the tightening will be driven by inflation trajectory and external risks.
With gradual unwinding of its liquidity measures announced during the pandemic, experts are of the view that deposit rates are headed upwards even before the RBI hikes policy rates later this year. Rajeev Radhakrishnan, CIO-fixed income, SBI Mutual Fund, said: “These changes along with gradual unwinding of durable liquidity, as announced, should push the effective overnight market rates closer to 3.75% against 3.35% so far and lead to corresponding alignment in other short-end segments.”
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