Priya Nair

Mumbai, Dec. 27

INTEREST rates always make for `interesting' news copy. Any kind of movement in interest rates would be keenly watched in 2006, as it was in 2005.

Most bankers and analysts agree that a rate hike is likely, but it would be marginal and gradual. Factors affecting interest rates such as liquidity and inflation are stable nowIn 2005, oil prices, which crossed $60 a barrel, caused some amount of worry as it has a direct impact on inflation. The US Federal Reserve's decision to continue with rate hikes, also seemed to indicate a scenario of rising interest rates.

In India, the Reserve Bank of India raised the reverse repo rate by 50 basis points in two rounds.

In April, it raised the reverse repo from 4.75 per cent to five per cent and in October to 5.25 per cent. In October, the apex bank also raised the repo rate from six per cent to 6.25 per cent. The first round of rate hike was greeted by private institutions such as ICICI Bank and HDFC by way of a hike in their home loan rates. It was merely a "carryover impact of 2004" said officials from these institutions. Other banks preferred to wait and watch.

After the second round of rate hike by the RBI, many banks hiked vehicle and personal loan rates.

Banks have also begun increasing domestic deposit rates and are likely to continue doing so next year as well, to raise funds to meet the rise in corporate credit.

While this may help them compete with other small savings, it would also put pressure on bank margins, as they would have to pay higher interest to depositors.

With the economy set for a growth of eight per cent, the Government has signalled banks to maintain `stability'.

In such a scenario, it is unlikely that interest rates would see a huge rise. However, a gradual and marginal rise, in the short term, is possible. This means a rate hike of 25-50 basis points is likely in 2006, according to bankers.

A rise in interest rates early in the first quarter is becoming "increasingly inevitable," said Mr Nicholas Winsor, Head of Personal Financial Services, India, HSBC.

Mr Cherian Varghese, Chairman and Managing Director, Union Bank of India, said: "The effect of more credit that banks gave in the previous years is being seen now with the rise in savings. Savings of individuals and corporates are coming back to the system. As liquidity is adequate, near term rates would remain stable or see a marginal rise." If rates do harden, a big or jerky movement that could affect the system is unlikely, according to Ms Chanda Kochhar, Executive Director of ICICI Bank.

"The factors that affect interest rates seem stable as of now. A rate hike, if at all, could be range-bound and gradual."

According to Mr Winsor, the main driver in retail loans, especially home loans, would be competition.

The latent demand for consumption would ensure that the current rate of growth is maintained, according to Mr Winsor. "We have increased mortgage rates twice, yet have seen healthy growth."

(This article was published in the Business Line print edition dated December 28, 2005)
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