Housing finance major HDFC hiked interest rate on home loans of up to Rs 30 lakh to 10.5 percent and that of Rs 30 lakh-sub Rs 75 lakh to 10.75 percent, effective December 1.
The 10 basis points (bps) rise in interest rate comes on the back of cost of funds adjustment, says Keki Mistry, vice-chairman and chief executive officer, HDFC in an interview to CNBC-TV18. Mistry however sees rates going down in 2014 when food prices will see a substantial decline owing to a good monsoon season.
Meanwhile, the Reserve Bank of India (RBI) has given permission to the home financier to raise USD 300 million through external commercial borrowing (ECB).
"The reason for raising money through the ECB window is because we raised a lot of money during the course of the year and tried to raise money from different sources. There is no pressure. There is no lack of availability of money,” he emphasises.
On what can be expected from the RBI monetary policy on December 18, Mistry says the central bank is likely to keep rates unchanged. “But they will have a leeway to lower interest rates April onwards,” he adds.
Below is the edited transcript of Mistry's interview to CNBC-TV18.
Q: Have you raised rates on home loans and if yes, by what quantum?
A: It is 10 basis points (bps). This is an adjustment which keeps happening all the time - when cost of funds comes down, rates are lower; when cost of funds goes up, rates are increased. The quantum of increase or quantum of reduction over a period of time is getting to 10 and 15 bps because that is the way interest rates have been in recent times. So yes, it is a 10 bps increase in rates, but my personal view is that in the coming year- 2014- one should start looking at lower interest rates, particularly in the period starting April.
Q: Will the pressure on the cost of funds ease now because of this USD 300 million external commercial borrowing (ECB)?
A: I do not think there is any easing or any pressure or anything of that sort. There is no pressure at all. The reason for raising money through the ECB window is because we raised a lot of money during the course of the year and tried to raise money from different sources. We raised money through term loans, bonds, deposits and refinance from the National Housing Bank and since this window has opened where we can raise money through the ECB window, we are looking at that. There is no pressure. There is no lack of availability of money. There is plenty of money available in Indian market, but we would like to diversify our source of funding and this is one of the sources we would look at. The entire loan will be fully hedged.
Q: Are you saying that USD 300 million would be the only money that you will raise via ECB for now and going forward would there be any other way to raise further money?
A: As far as ECB is concerned, there is a Reserve Bank of India (RBI) limitation in the sense that RBI says that one cannot borrow money from overseas centering it back into India. However, they have opened this window for a while where they have said that up to USD 1 billion money can be raised from overseas, provided the money is lent to people for housing loans where the loan amount is less than Rs 25 lakh; where the price of the house is less than Rs 30 lakh; and where the area of the house is less that 60 square meter.
We do a fair number of such loans, and because of that we would be in a position to raise money through this window. So, we have applied to RBI for being able to take some part of the ECB limit of USD 1 billion and we got approval to raise up to Rs 300 million.
Q: What are you expecting from RBI from the December 18 policy?
A: December 18 is a very tough call, because we had inflation numbers which have been high. However, if one breaks down the inflation between core inflation and food inflation, one will see that the real pressure on inflation is happening because of food prices.
We also know that we had very good monsoons this year. We also know that hopefully with good monsoons food prices should start coming down. Also, as we get into 2014 we will start coming up with a much larger base figure and as the base figure is higher the headline inflation number will start looking lower and that is the reason why I believe that RBI will start having the ability to look at lower interest rates as we get into the period starting April.
The food produce, the food crop, the harvest season, all that happens only in December-January, so lowering of inflation number in my view starts in only post-February. So, December will continue to remain high. Now on December 18 what RBI does is a tough call. My personal view is they will do nothing, they will not raise rates, they will not drop rates, but you cannot completely rule out the possibility of a quarter percent increase in rates by RBI.
Q: On the cost of funds itself I just wanted to understand are the cost of funds for ECBs lower than the domestic borrowings?
A: Yes, they would be lower. We are looking at raising money at rates which would be sub-200 bps to London Interbank Offered Rate (LIBOR). So, we are looking at 190-195 bps, somewhere in that range. If one looks at LIBOR, today it is half a percent, even the effective cost of hedging the money would be lower than rupee cost for sure at this point of time.
The biggest cost is not the LIBOR cost or the spread over LIBOR, but it is the hedging cost, because the hedging cost is really a function of the way Mumbai Interbank Forward Offer Rate (MIFOR) rates are in India and the way the US swap rates. Currently MIFOR rates in India are very high, because of which the swap cost is very high. Other than the swap cost, the cost of the money is less than 2.5 percent. It is really the swap cost which adds to the cost and swap cost can be a little over 6 percent or so.