Home, retail loans may be cheaper in 2008

The new year is likely to bring good news for borrowers as interest rates on home and consumer loans could decline from the second quarter but high fuel and food prices might play spoilsport by putting pressure on inflation, bankers and economists said.

Experts feel interest rates have peaked and, with deposit rates on the decline, consumers could see softening of interest rates in 2008 as the prudent stance of Reserve Bank of India (RBI) for almost the whole of last year managed to keep inflation low without disrupting economic growth.

"Our margins were a bit strained during the year but now banks have begun reducing deposit rates. With RBI's objective to keep inflation close to 3% in the medium term, interest rates are bound to come down," M V Nair, chairman and managing director,  Union Bank of India, told PTI.

Rana Kapoor, managing director and CEO, Yes Bank, also felt a 0.5% reduction in interest rates was in the offing. "We see no decline in interest rates in the next three months. RBI is not likely to reduce rates in January but in the next fiscal starting April, there could be a reduction of half a per cent," he said.

Reserve Bank has raised key interest rates six times in the past year-and-a-half. It has also raised banks' mandatory cash deposits or cash reserve ratio by 2.5% since December 2006 to 7.5% for tightening liquidity as part of steps to keep inflation within limits.

Banks also raised interest rates on home, vehicle and personal loans in line with these measures. At present, floating home loan interest rates range from 10-11.5%, while fixed rates are higher by two-three percentage points.

Meera H Sanyal, India chief of ABN Amro Bank, also echoed the view and said there could be a small decline in rates. Inflation based on wholesale prices would remain within the RBI's comfort zone of below 5%, she said.

Some others felt that inflation, which touched 3.45% during the week ended December 15, could accelerate if the government allows state oil firms to raise prices of petrol, diesel, cooking gas and kerosene. High prices of food products like wheat and edible oil could also put pressure on inflation. In such a scenario, RBI may keep up its tight monetary stance this year as well.

"Consumers are unlikely to get any relief in the near future as there is little chance of interest rates coming down due to high inflationary expectations," HDFC Bank chief economist Abheek Barua said last week.

Fuel and food prices remain key concerns, he said, adding that a revision in oil prices can push inflation beyond 4%.

With elections in the politically sensitive state of Gujarat over, the UPA government is widely expected to raise fuel prices this month.

(Reporting by Nupur Acharya)