RBI reduces CRR to impart liquidity
Cash reserve ratio down by 50 bps, inflation has fallen below 12%, oil price has slipped dramatically... enough reasons to show rate hikes have peaked, say top bankers.
By ET Bureau |
MUMBAI: This is as high as it gets as far as home loans are concerned. Bankers are calling it a peak on interest rates, with the Reserve Bank of India (RBI) reducing cash reserve ratio (CRR) to impart liquidity.
The move addresses the one remaining factor that has been exerting upward pressure on rates. Inflation and oil prices ��� the two other main drivers of interest rates ��� have already shown signs of easing.
���Oil prices are coming down and inflation has moderated. Liquidity was an issue and this move by RBI will infuse liquidity. I am hoping that interest rates have peaked,��� said HDFC chairman Deepak Parekh.
HDFC���s floating rate loans are available at 11.75%, while the interest on fixed-rate loans is around 14%. Floating-rate loans by some state-owned banks are cheaper, but they are going slow on advances.
RBI���s CRR cut, which comes into effect on October 11, will release Rs 20,000 crore. Bankers are hopeful that this will ease the extreme credit crunch that had resulted in many banks cutting any form of funding to corporates. The credit crunch, which was a fallout of foreign investors pulling out funds, was precipitated by RBI measures and would have worsened this quarter because of an increase in government borrowing.
ICICI Bank Jt managing director Chanda Kochhar said the move would bring down pressure on short-term borrowing rates. She was, however, unwilling to take a long-term view on interest rates, as the measures were described as ad hoc by the central bank. She added no other rates would change on account of the CRR cut.
The uncertainty over interest rates had pushed up the differential between fixed and variable loans to over 3.25 percentage points. While this difference was enough for any borrower to go for a floating-rate loan, there was always a lurking fear that interest rates could rise further. Now, with RBI reducing pressure on liquidity, there is even more incentive to go for a floating-rate loan.
According to Canara Bank CMD AC Mahajan, the CRR cut will take care of huge credit demand which is generating due to festival season. ���We do not expect interest rates to move from here, especially for the retail segment. This will give banks an opportunity to offer discount on festive season,��� he said. Until now, the only festival offers by banks have been on deposits, with banks offering over 11% on medium-term deposits.
The credit crunch had first forced banks to discontinue sub-PLR loans to corporates. Subsequently, the short-term borrowing costs zoomed. In recent weeks, large banks simply stopped lending, as advance tax outflows coupled with RBI sucking out rupee liquidity resulted in a cash crunch.
In the short term, the liquidity outflow would be determined by the extent of RBI intervention to neutralise FII outflows, followed by the extent of government borrowing and with demand for credit. Inflows will largely be determined by government spending and further reduction in reserve requirements by the central bank.
On Saturday, before the central bank announced its measures, State Bank of India chairman OP Bhatt said that rates have peaked, but were unlikely to come down soon because of tight liquidity.
The move addresses the one remaining factor that has been exerting upward pressure on rates. Inflation and oil prices ��� the two other main drivers of interest rates ��� have already shown signs of easing.
���Oil prices are coming down and inflation has moderated. Liquidity was an issue and this move by RBI will infuse liquidity. I am hoping that interest rates have peaked,��� said HDFC chairman Deepak Parekh.
HDFC���s floating rate loans are available at 11.75%, while the interest on fixed-rate loans is around 14%. Floating-rate loans by some state-owned banks are cheaper, but they are going slow on advances.
RBI���s CRR cut, which comes into effect on October 11, will release Rs 20,000 crore. Bankers are hopeful that this will ease the extreme credit crunch that had resulted in many banks cutting any form of funding to corporates. The credit crunch, which was a fallout of foreign investors pulling out funds, was precipitated by RBI measures and would have worsened this quarter because of an increase in government borrowing.
ICICI Bank Jt managing director Chanda Kochhar said the move would bring down pressure on short-term borrowing rates. She was, however, unwilling to take a long-term view on interest rates, as the measures were described as ad hoc by the central bank. She added no other rates would change on account of the CRR cut.
ADVERTISEMENT
The uncertainty over interest rates had pushed up the differential between fixed and variable loans to over 3.25 percentage points. While this difference was enough for any borrower to go for a floating-rate loan, there was always a lurking fear that interest rates could rise further. Now, with RBI reducing pressure on liquidity, there is even more incentive to go for a floating-rate loan.
According to Canara Bank CMD AC Mahajan, the CRR cut will take care of huge credit demand which is generating due to festival season. ���We do not expect interest rates to move from here, especially for the retail segment. This will give banks an opportunity to offer discount on festive season,��� he said. Until now, the only festival offers by banks have been on deposits, with banks offering over 11% on medium-term deposits.
The credit crunch had first forced banks to discontinue sub-PLR loans to corporates. Subsequently, the short-term borrowing costs zoomed. In recent weeks, large banks simply stopped lending, as advance tax outflows coupled with RBI sucking out rupee liquidity resulted in a cash crunch.
In the short term, the liquidity outflow would be determined by the extent of RBI intervention to neutralise FII outflows, followed by the extent of government borrowing and with demand for credit. Inflows will largely be determined by government spending and further reduction in reserve requirements by the central bank.
ADVERTISEMENT
On Saturday, before the central bank announced its measures, State Bank of India chairman OP Bhatt said that rates have peaked, but were unlikely to come down soon because of tight liquidity.
Download
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
Download
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
ADVERTISEMENT
