Status quo

CREDIT POLICY IMPACT

Any relief due to a possible reduction in the interest rates is out for the consumer. Last week, the Reserve Bank of India's (RBI) credit policy kept the reverse repo and repo rates untouched while increasing the cash reserve ratio (CRR) by 50 basis points.

"This is aimed at correcting the aberration of surplus liquidity," says Abheek Barua, chief economist, HDFC Bank. The result: a reduction in the deposit rates while the lending rates stay static for the time being so that banks do not face a pressure on their net interest income. As far as numbers go, the deposits rates are likely to come down to about 8.5-9 per cent as against the current rates of 9.5 per cent on one-year deposits.

Meanwhile, Finance Minister P Chidambaram, had also goaded banks to reduce deposit rates as he wants lending rates to be brought down to help sectors like auto and real estate so that the growth rates are not impacted. But this seems unlikely in the short term, according to banking industry observers. Says A Prasanna, vice-president, ICICI Securities, "Lending rates will continue to remain stable in the short term."

"Certain interest-sensitive sectors like automobiles and real estate, where large value deals require the consumer to borrow, would be adversely affected," points out Indranil Pan, chief economist, Kotak Securities. This would be keeping in line with RBI governor Reddy's plan to slow down the excesses in retail lending including loans for homes, cars and consumer durables.

Going forward, on the interest rate front, one can expect the market to stay tight for the next three months. Of course, when the buying season starts in the month of October, there are fears that the inflation which has been brought some control (at 4.4 per cent) could go up because of credit offtake. This could invite another hike from the apex bank to rein in inflationary pressure.

Experts are of the opinion that another 50 basis points cannot be ruled out. As the G-sec chart shows, interest rates have been on the rise.This would typically mean that for potential home buyers or car buyers, the costs could get higher in the months to come.

The only saving grace could be come, if the prices of assets like land start correcting themselves. This would provide much relief for the home buyer.