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Prospects of sharply lower interest payments on homes, cars and project loans this year may remain elusive with an all round rise in prices forcing people to spend more of their income rather than save.
To attract more funds when deposit growth is at a seven-year low, banks will have to keep deposit rates high at least to repay maturing deposits. That leaves little room for banks to cut lending rates.
Lenders' dilemma in lowering interest rates after the Reserve Bank of India's 50 basis points cut in repo rate, the rate at which it lends to banks, was reflected in the country's biggest mortgage lender Housing Development Finance Corp's hesitation to commit on lower rates, unlike banks that buckled under government pressure.
"Even after the Reserve Bank of India cut lending rates by 50 basis points we have not seen the bond yields change," Keki Mistry, managing director at HDFC had said. "Unless our cost of funds comes down we would not be a position to cut rates." A basis point is 0.01 percentage point.
No More Rate Cuts
The benchmark 10-year government bond tells the story. The investors who bought these bonds at a yield of 8.22% on the day when RBI cut rates, are now demanding around 8.5%. With the government set to borrow Rs 5.7 lakh crore, there's little room for easing, unless private sector demand collapses.
A rise in the rate of inflation for April to 7.23% from 6.89% a month before, erased the last ray of hope of a cut when the central bank reviews monetary policy on June 18.
Other factors such as the sliding Indian rupee to the US dollar, slowing deposits growth, strong demand for loans, record government borrowings and surging bad loans may keep market rates high.
"Structural inflation, and the middle class' demand for food, limits the RBI's ability to pursue easy monetary policy," said Chin Loo Thio, the Singapore-based regional strategist for BNP Paribas. "There is a limit to which the monetary policy can be effective."
Deputy governor Subir Gokarn himself poured cold water on any hopes of a sharp reduction in interest rates last week.
"We started that process [of reducing interest rates] in April," Gokarn said in Hyderabad recently. "But if you look at our inflation projections in relation to what we consider as long-term or medium objective there are inflationary pressures. That in a sense limits the room that we have to reduce rates."
A lot of the good times that the citizens and the corporate world enjoyed was partly due to subsidies on oil and power. But that has reached proportions that can't be sustained anymore. When the inevitable happens, higher power and fuel costs will set off another round of price increases by businesses. Finance minister Pranab Mukherjee is threatening to impose austerity measures.
Food prices, at the mercy of the monsoon and government-controlled support prices, are unlikely to ease either, despite record food grain production. Farm wages in many parts of the country have more than trebled to about Rs 300 a day in a span of four years, thanks to the guaranteed employment programme of the government.
The minimum support price for wheat was raised 15% last October, doubling it since prime minister Manmohan Singh's government came to power. For oilseeds it was increased by as much as 35%. Farmers are agitating for higher prices.
GoI Heal Thyself
The unreliable and 'analytically bewildering' Index of Industrial Production at a negative 3.5% for March and a looming financial catastrophe if Greece exits euro are the two factors that could make funds cheaper, but that may not be of help since animal spirits would have been shattered.
"IIP number will be of concern to the RBI, but it may still remain on hold for a bit in light of recent improvements in PMI [Purchasing Managers Index] readings, faster credit growth, and still firm inflation pressures,'' said Leif Esksesen, an economist at HSBC. "The weak exchange rate and wide current account deficit in the context of global risk aversion also limits the RBI's room to move.''
But any stimulus in the form of lower interest rates could not match that which happened after Lehman Brothers collapsed in 2008 leading to a credit market seizure. The lesson learnt from that is that a liquidity issue cannot be treated as financial crisis here as it happened then.
Forcibly lowering cost of funds when the price of everything is rising could be counter-productive as it happened in the past when savers rushed to gold and real estate with little faith in a currency that yielded two years of negative returns in bank deposits. If the markets want easy money, then government should set its house in order.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Prospects of sharply lower interest payments on homes, cars and project loans this year may remain elusive with an all round rise in prices forcing people to spend more of their income rather than save.
To attract more funds when deposit growth is at a seven-year low, banks will have to keep deposit rates high at least to repay maturing deposits. That leaves little room for banks to cut lending rates.
Lenders' dilemma in lowering interest rates after the Reserve Bank of India's 50 basis points cut in repo rate, the rate at which it lends to banks, was reflected in the country's biggest mortgage lender Housing Development Finance Corp's hesitation to commit on lower rates, unlike banks that buckled under government pressure.
"Even after the Reserve Bank of India cut lending rates by 50 basis points we have not seen the bond yields change," Keki Mistry, managing director at HDFC had said. "Unless our cost of funds comes down we would not be a position to cut rates." A basis point is 0.01 percentage point.
No More Rate Cuts
The benchmark 10-year government bond tells the story. The investors who bought these bonds at a yield of 8.22% on the day when RBI cut rates, are now demanding around 8.5%. With the government set to borrow Rs 5.7 lakh crore, there's little room for easing, unless private sector demand collapses.
A rise in the rate of inflation for April to 7.23% from 6.89% a month before, erased the last ray of hope of a cut when the central bank reviews monetary policy on June 18.
Other factors such as the sliding Indian rupee to the US dollar, slowing deposits growth, strong demand for loans, record government borrowings and surging bad loans may keep market rates high.
"Structural inflation, and the middle class' demand for food, limits the RBI's ability to pursue easy monetary policy," said Chin Loo Thio, the Singapore-based regional strategist for BNP Paribas. "There is a limit to which the monetary policy can be effective."
Deputy governor Subir Gokarn himself poured cold water on any hopes of a sharp reduction in interest rates last week.
"We started that process [of reducing interest rates] in April," Gokarn said in Hyderabad recently. "But if you look at our inflation projections in relation to what we consider as long-term or medium objective there are inflationary pressures. That in a sense limits the room that we have to reduce rates."
A lot of the good times that the citizens and the corporate world enjoyed was partly due to subsidies on oil and power. But that has reached proportions that can't be sustained anymore. When the inevitable happens, higher power and fuel costs will set off another round of price increases by businesses. Finance minister Pranab Mukherjee is threatening to impose austerity measures.
Food prices, at the mercy of the monsoon and government-controlled support prices, are unlikely to ease either, despite record food grain production. Farm wages in many parts of the country have more than trebled to about Rs 300 a day in a span of four years, thanks to the guaranteed employment programme of the government.
The minimum support price for wheat was raised 15% last October, doubling it since prime minister Manmohan Singh's government came to power. For oilseeds it was increased by as much as 35%. Farmers are agitating for higher prices.
GoI Heal Thyself
The unreliable and 'analytically bewildering' Index of Industrial Production at a negative 3.5% for March and a looming financial catastrophe if Greece exits euro are the two factors that could make funds cheaper, but that may not be of help since animal spirits would have been shattered.
"IIP number will be of concern to the RBI, but it may still remain on hold for a bit in light of recent improvements in PMI [Purchasing Managers Index] readings, faster credit growth, and still firm inflation pressures,'' said Leif Esksesen, an economist at HSBC. "The weak exchange rate and wide current account deficit in the context of global risk aversion also limits the RBI's room to move.''
But any stimulus in the form of lower interest rates could not match that which happened after Lehman Brothers collapsed in 2008 leading to a credit market seizure. The lesson learnt from that is that a liquidity issue cannot be treated as financial crisis here as it happened then.
Forcibly lowering cost of funds when the price of everything is rising could be counter-productive as it happened in the past when savers rushed to gold and real estate with little faith in a currency that yielded two years of negative returns in bank deposits. If the markets want easy money, then government should set its house in order.
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