Loans to cost more, but deposit rate hikes to compensate

A surprise hike in the repo rate will increase the cost of borrowing for households

Millions of existing floating rate home loan borrowers may see their EMIs increase after the Reserve Bank of India hiked the repo rate by 25 basis points. However, only new auto and personal loan rates are likely to go up while existing borrowers will not be impacted. At the same time, savers in fixed deposits and other fixed income products could see a rise in interest incomes, but how soon banks pass on this to depositors remains to be seen.

The repo rate hike is expected to increase the cost of deposits of banks. Banks are already increasing their base rates against which these floating rate home loans are adjusted. Housing finance companies had already increased the home loan rates marginally in the past two months.

K R Kamath, chairman and managing director of Punjab National Bank and Chairman of Indian Banks' Association feels it's too early to take a call on whether banks will hike lending or deposit rates. “we need to wait and watch before we can take a call on lending rates. In case there is an increase in credit and if liquidity comes under pressure, then banks will have to increase rate.”

“The Reserve Bank of India announcement today, will have a net impact of a slight savings for banks, in the short term. So, overall the impact will not be too adverse. The RBI move may not translate into a hike in base rate in the immediate future,” explains HS Upendra Kamath, chairman and managing director of Vijaya Bank.

On Thursday, State Bank of India -- the country's largest lender – hiked both its deposit and base rate, ahead of the monetary policy review. The lender has hiked the base rate by 10 basis points to 9.80 per cent while deposit rates by 30-100 basis points across various maturities. The bank pays 6.50 per cent for a one-year deposit for deposits less than Rs 1 crore. A home loan of up to Rs 30 lakh is available at 9.95 per cent and those above Rs 30 lakh is available at 10.10 per cent. Most importantly, the lender has also hiked the spreads on home and auto loans by 30 basis points.

Last month back private banks had raised their base rates. For instance, ICICI Bank, Axis Bank and YES Bank raised its base rate by 25 basis points each to 10, 10.25 and 10.75 per cent, respectively. HDFC has decided to raise its retail prime lending rate, on which its adjustable rate home loans are benchmarked, by 25 basis points to 16.65 per cent from Friday. Following the rate revision, it would offer housing loans up to Rs 30 lakh at 10.40 per cent and loans above Rs 30 lakh at 10.65 per cent.

The private lenders had also raised their deposit rates before the lending rate hikes. ICICI Bank had increased it by 50-75 basis points, HDFC Bank by 100 basis points, Axis Bank and YES Bank by 25-225 basis points.  

Savers can however heave a sigh of relief. Interest rates on fixed deposits is likely to go up by around 25 basis points, but not any time soon. Short-term debt funds are also expected to see a rise in yields in the immediate future. Investors could take advantage of these rate hikes and lock-in at higher rates. Experts advise short-term debt funds or liquid funds where the returns are higher.

The 10-year bond yield increased by 38 basis points to 8.57 percent since yesterday. Corporate bond yields are hovering around the 10.25 percent mark.

Says Prateek Pant, director – products and services at RBS Private Banking, “We believe that investing in short-term funds and accrual funds will help investors make capital gains in addition to the coupon rate. This apart, we are also including five to ten per cent in duration funds as we believe that interest rates are near their peak and may start moving the other way soon.”

Lending Rates

Lending Rates for loans up to Rs 30 lakh (%)	Lending Rates for loans up to Rs 30 lakh (%)
SBI	9.95
Canara Bank	9.95
ICICI Bank	10.4
HDFC Bank	10.4
Axis Bank	10.25 (up to Rs 25 lakh)

Debt Fund Returns

			Returns (%)
	6-months	1-year	3-year	5-year
Liquid funds	4.33	8.5	8.62	7.31
Income funds	2.74	7.92	8.25	7.87
Short-term funds	3.25	7.69	8.44	8.03
Ultra short-term funds	4.21	8.46	8.74	7.55