The Hindu Business Line : Lending rates are headed down, say economists

Chennai, Jan. 31 Economists think interest rates in India are headed down, following the 0.50 percentage point rate cut by the US Fed. A slowing global economy, stronger domestic currency, and stronger bond and stock prices are the common forecasts.

But the rate cuts may not happen just yet. Economists think it likely that the cuts by the RBI may have to wait for the April policy. And banks will cut lending rates probably in the first quarter of the next fiscal — only after they replace existing high cost deposits that may be maturing in March.

The bad news is for IT companies, textile and pharmaceutical companies, which may see lesser earnings with currency appreciation.

Mr A. Prasanna, Vice-President, Fixed Income Research, ICICI Securities, said, “The 50 bps rate cut by the Fed, bringing the policy rate in US to 3 per cent, is in reaction to significant downside risks to an economy, which is already slowing down. Further rate cuts by the Fed in the next few months cannot be ruled out. The evolving scenario is in line with our view that the global economy is likely to slow down appreciably in 2008. Along with a strong currency, this represents a double whammy for India’s exporters.

India outlook

“We see domestic growth slowing down below 8 per cent in FY09 due to the global slowdown and lagged effects of past monetary tightening. Accordingly, we maintain the view that rates in India are headed down. However, the political imperative of containing inflation means that RBI is likely to wait until the April policy before cutting the repo rate by 25 bps.”

Dr Rupa Rege Nitsure, Chief Economist, Bank of Baroda, said, “The RBI will not move away from its current policy stance in response to the Fed decision. Inflation figure in India is distorted at present as it carries the influence of “repressed” inflation in domestic fuel prices, besides elevated global prices of food (especially wheat and edible oils) and other commodities and excessive growth in M3 at 22.4 per cent.

In the presence of such rising inflation-related risks, the RBI will not like to cut policy rates despite widening of interest rate differential between India and the US. Moreover, “interest rate differential” is not an important factor for India which does not have an open capital account and which has kept tight controls over the debt inflows.”

Rate signals

Dr Nitsure also thinks that the banks need not wait to receive any “interest rate signal” from the RBI. She points out that when their deposit growth (at 25.2 per cent ) is much in excess of credit growth (at 21.5 per cent ), they can cut deposit rates.

She says, “Most of the high-cost term deposit schemes floated by banks last year are going to mature in February/March 2008 and “re-pricing” of such deposits would enable them to slash lending rates in Q1, FY09.

Moderation of growth in manufacturing production, especially interest-sensitive sectors like consumer durables, lower demand for housing loans and large resource base are enough reasons for banks to lower the borrowing costs not just for large corporates but also for SMEs and middle class home loan customers by paying due attention to risk management principles.”

She says, “The saturation of investment opportunities in the US may trigger more capital inflows to India, more pressure on rupee, increased RBI intervention in the forex market, and a possibility of another CRR hike as a sterilisation tool in the coming months. So going forward, banks have to prepare themselves to shoulder the increasing burden of ‘reserve taxation’”.

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