RBL Bank's Strategy Head Jaydeep Iyer expects the Reserve Bank of India (RBI) to keep rate hikes on hold for the current fiscal year. The RBI had, on April 6, left its key repo rate unchanged at 6.5 percent.
The move has offered some relief to home loan borrowers and is expected to help sustain the swing in demand for home loans that had been slowing down, Iyer told Moneycontrol in an interview.
Unlike the US Fed, the RBI prefers to take a nuanced approach to interest rate changes, increasing them gradually and not immediately cutting them, he said. “It is sensible to wait and assess the impact of the rate hikes that have already happened in the past 11 months or so,” he said.
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“It is a relief for Indian borrowers because since the banking system moved towards an external benchmark-linked rates, banks did not have much of a choice but to pass on the hikes to existing customers. Rate hikes of 2-2.5 percent would mean tenors going up for home loans quite significantly and any rate hike from here on would largely translate into EMI increases. So, it’s good from that perspective,” Iyer said.
Asked about the risk that the high deposit rates of around 7-8 percent pose to bank margins in the coming quarters, Iyer said that banks had benefited from repricing their loans upwards after the repo rate increase.
The yield of deposits had not gone up at the same pace, and the catch-up would happen over the next six months or so.
The first half of the current fiscal would likely see slightly negative margins on a like-to-like basis, but Iyer believes that banks would work towards changing the mix of their products, such as offering more unsecured loans, to mitigate the impact.
Credit to industries slow down
Discussing credit growth, Iyer said that while retail credit had been strong, credit to the large industry had been sluggish and he does not expect a significant pickup in credit to large industries anytime soon.
“I think that while in some sectors where government intervention clearly played a role, like cement and steel, we will see capex plans coming through, in general, I don't see any rapid growth. It will inch up a little bit but the main driver for growth over the next 12 months is still going to be retail,” Iyer added.
Regarding liquidity, Iyer said that banks have been used to a neutral liquidity scenario for a while now.
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“What is critical is that we have already seen deposit rates of close to 8 percent for one year or even nine months and I think that can go up a little more. So as long as we are in the zone of -50 to +50, I don't think short-term liquidity is a big deal,” he said.
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