Opinion among bankers is mixed over whether interest rates are likely to soften, even as two state-owned banks?Central Bank of India and Canara Bank?on Wednesday reduced home loan interest rates by 50 basis points.
Housing Development & Finance Corporation (HDFC) also recently cut home loan rates by 50 basis points to 10.5% as part of its festive offer. Central Bank and Canara Bank home loan rates are now at 10.75% and 11%, respectively.
Bankers variously interpret the banks? cut in interest rates as testing the market or as bait to pep up sagging credit portfolios. The increase in foreign exchange inflows has also led to an oversupply of rupees through dollar sales?thus reducing funding costs for banks and finance companies, which are being passed on.
Corporation Bank chairman & managing director B Sambamurthy is still cautious about the interest rate scenario. ?This is the first time in the history of the country that we are facing such massive capital inflows through foreign institutional investors and foreign direct investments. We have no past track record to fall back on and decide the future course. So the word is uncertainty,?? Sambamurthy said, adding, ?We need to wait and watch before making any move on interest rates.??
Foreign exchange inflows have led to sharp appreciation of the rupee, currently at a nine-year high of 39.58 to the dollar. The market has witnessed large forex inflows following the September 18 Fed rate cut by 50 basis points to 4.75%. For the week ended September 21, RBI said foreign exchange reserves were up $3.7 billion to $235.9 billion.
RBI has been buying dollars to ensure that the rupee does not appreciate sharply, thereby infusing more rupees into the market. This rupee glut is being absorbed through the market stabilisation scheme (MSS) operations of the RBI. ?The rates are artificially propped up due to an oversupply of RBI?s MSS,? said Pradeep Madhav, MD, STCI Primary Dealer.
?Given the ample liquidity conditions, short-term rates should ideally go southwards,?? he added.
RBI, for this week, slotted the Rs 7,000-crore auction of two dated securities, the 5.87% Government Stock 2010 and 11.3% Government Stock 2010, and another Rs 6,000 crore in 91- and 182-day Treasury bill auctions. Thus, it is targeting a liquidity drain-out of Rs 13,000 crore.
?Under present conditions and with low bank credit offtake, I expect the yield curve, at the longer end of ten years, to correct downwards of 40-50 basis points by March,?? said Madhav. He expects the ten-year yield to drop from the current level of 7.9% to at least 7.5%.
Axis Bank president Parthasarathi Mukherjee, however, disagrees: ?I do not see any impact of liquidity in the market affecting interest rates because of RBI?s periodic MSS operations.??
He adds: ?The rates are seen steady at the short end of three to six months while at the longer end (above six months), the trend could be that of a softening.??
Another senior official at a government bank who spoke on condition of anonymity said that Canara Bank and Central Bank of India were testing the market with rate cuts on select loans.
?Interest rates are poised downward, but banks are unlikely to change their prime lending rates,? he said. Bank PLRs currently hover between 11.75% and 12.25%.
Mohan Shenoi, treasurer at Kotak Mahindra Bank, feels that the interest rate at the short end of the yield curve is seen pressured upwards, which could lead to some flattening of the curve as the long term remains static between 7.75% and 8.1%.