Low Borrowing Rates Are Here To Stay... At Least For Now

This will mean that borrowing rates are unlikely to rise in the near term. On the flip side, depositors may continue to see smaller returns on the funds they park with banks.

Interest Rates Have Settled At Lows

The weighted average lending rates on fresh rupee loans eased to 8.12% in December 2020 — the lowest in at least seven years for which data is available with the RBI. The weighted average lending rates on outstanding rupee loans also fell to at least a decadal low 9.38% in December.

The decline in interest rates is evident, particularly across large public sector banks.

At the State Bank of India, home loans start at 7-7.35% for salaried employees, while interest rates for auto loans are at 7.5% on application through its digital banking platform. At HDFC Bank, the largest private lender, interest on auto loans start at 8.8%.

Inflation within the MPC’s target range, banks flush with liquidity and the government’s push to revive economic growth, have set the pace for low-interest rates in the near term, said Pankaj Bansal, chief business development officer at Bank Bazaar.

In September 2019, the Reserve Bank mandated that all floating rate retail and small business loans be linked to an external benchmark, such as the policy repo rate. This helped bring down lending rates and will help keep them low unless a borrower’s credit worthiness changes.

Corporate Borrowers Also Benefitting

Corporate borrowers are also continuing to benefit, although rates have risen marginally compared to the lows hit in 2020.

Short term borrowings via commercial paper can still be raised at below 4% by high rated borrowers. In some cases, AAA-rated firms have been able to raise short term funds at below the repo rate, at which the RBI lends funds to banks. Given surplus liquidity, these short term rates have veered closer to the reverse repo rate, which banks earn while parking funds with the RBI.

For longer-term borrowings, AAA-rated borrowers are paying close to 5.25% for a three-year tenure. AA and A-rated borrowers are, however, still paying a much higher rate of between 6.08-7.91%, suggesting that risk appetite is still low.

The RBI’s intention to keep government borrowing costs low will likely mean that corporate borrowing costs will also stay in check.

The benchmark 10-year bond yield is expected to shift to a range of 6-6.25% for the next financial year from 5.80-6% in the ongoing financial year, said Soumyajit Niyogi, associate director at India Ratings & Research. While the government’s budgeted borrowings for 2021-22 are high, the RBI’s active intervention will keep overall interest rates under control. “For corporate bond yields, a benign stream of issuances and improving bank appetite will keep the interest rate trajectory in check,” Niyogi said.

To be sure, risks such as a rise in global bond yields and higher commodity prices could impact interest rates in the Indian debt market too, he added.

Depositors At The Losing End

While borrowers benefit, depositors will continue to see lower returns. When adjusted for inflation, real deposit rates have fallen significantly over the past 12 months.

The weighted average domestic term deposit rates on outstanding rupee term deposits fell to 5.57% in December 2020, the lowest in at least eight years, according to data on the RBI.

The interest on term deposits for one-two years was at 5% in State Bank of India, while it was at 4.9% at HDFC Bank for the same duration.

Instead of timing investments on the basis of interest rate regime, depositors will have to focus on the right product on the basis of their risk appetite and time horizon, said Naveen Kukreje, CEO and co-founder at Paisabazaar.com.

With the interest rate regime dependent on multiple factors like monetary policy, inflation, credit growth rate, deposit growth rate, etc, making an accurate prediction of the bottom or peak of an interest rate cycle is very difficult, he added.