Mortgage rates may soon rise; retail depositors should see higher returns

Interest rates on home loans may rise soon even though banks will continue to raise deposit rates.

Bankers said it was somewhat unreasonable to expect mortgage rates to be between 6.4 and 6.5% when the benchmark yield is north of 7%. Although home loans are generally tied to the repo rate, which was left unchanged by the Reserve Bank of India (RBI) on Friday, interest rates in the system are now expected to rise over the coming months, with some economists expecting at a repo rate. hiking from the month of June,

Ashwani Bhatia, chief executive of the State Bank of India, told a TV station that “a change in home lending may be coming soon.” According to Ashish Jain, MD, Star Housing Finance, home borrowers with variable rate loans should prepare for an increase in the interest rate, which would result in either a higher EMI or a longer loan term. However, borrowers should consider the pros and cons of switching to the fixed rate plan after carefully considering the costs and industry offerings, he added.

Bankers have said deposit rates will continue to rise. There has been a rate increase for bulk deposits in recent months, but rates on retail deposits have only increased slightly by about 5 basis points. Market experts expect retail borrowers to benefit more soon.

The Reserve Bank of India signaled on Friday that the era of ultra-low interest rates may well be over, with the balance seemingly tipped in favor of fighting runaway price increases. While borrowers have benefited from low lending rates, depositors have seen their money grow at a slower rate than inflation, as real rates have remained in negative territory for most of the pandemic. As a result, investors sought riskier assets like stocks for better returns during this period.

Experts said the RBI’s change in tone will now help set market expectations. Banks will consider raising deposit and lending rates in the future, if the first rate hike comes in August. So far, banks have offered very attractive rates to borrowers, as credit growth has been tepid during the pandemic. The intense competition has impacted bank margins, especially state-owned ones, as rates have remained low. With the RBI’s shift in stance, the rate cycle is indeed poised to turn. Crisil Research believes that the change in tone and narrowing of the Liquidity Adjustment Facility (LAF) corridor will set markets up for repo rate hikes. The rating agency expects hikes of between 50 and 75 basis points in fiscal 2023, starting with the monetary policy review in June. The pace of tightening will depend on the path of inflation and external risks.

With the gradual unwinding of its liquidity measures announced during the pandemic, experts believe deposit rates are heading higher even before the RBI raises key rates later this year. Rajeev Radhakrishnan, CIO-Fixed Income, SBI Mutual Fund, said: “These changes, along with the gradual unwinding of sustainable liquidity, as announced, should bring effective overnight market rates closer to 3.75% from 3 .35% so far and lead to corresponding alignment in other short-term segments.