Will the era of low interest rates begin soon?

Dear Readers,

It's been almost two years since there has been no change in EMI on your car or other loans. Because the Reserve Bank of India has not changed the repo rate in the last 20 months. Next week the US Federal Reserve is most likely to reduce the policy rate for the first time since the pandemic, which has sparked speculation about whether the era of low interest rates would soon begin. More importantly, will the rates in India come down? Here’s my view.

Two years ago, in September 2022, the RBI increased the repo rate by 50 bps to 5.50%, and then in a series of 25 bps hikes in the subsequent policies to the current 6.50%. It has been 20 months since the last rate hike and there has been a status quo on rates, which means that you have to bear the bigger interest rate burden on your loans.

Fed to reduce rates

But the winds of change are blowing. The US Federal Reserve is most likely to reduce rates by 25 bps, if not 50 bps, in its policy meeting next week. Hopes are high this time because Jerome Powell, US Federal Reserve Chairman has earlier said that, “It’s time to shift gears on monetary policy,”. His statement has prepared the world for the rate cut.

The Fed is anticipated to cut rates because the US inflation is currently in a comfort zone. Also, there are reports that the US may face a recession, and in such an environment the Fed will have no option but to go for a low interest rate regime and protect businesses and jobs.

Will rates come down in India?

Will the RBI reduce the repo rates after the Fed does? The answer is that instantly RBI may give hints or add it into its commentary but perhaps will take some time to reduce rates as it will look for the alignment of CPI inflation, which is still in an unsettling phase. The yield on the government bonds has already come down significantly. But the capital market will immediately respond to the Federal Reserve’s rate cut and the chances are high that there will be a rally.

If not on the interest rates side, but on the other side there would be benefits of any reduction by the US Fed. Import bills will be reduced and there are high chances that the rupee will stabilise or appreciate against the greenback. In other words, the dollar against the rupee will be weaker. This will encourage Indian corporates who want to raise dollars.

The major difference will be specifically on the FPI and FDI flows, which will certainly go up. In fact, the FDI inflow has improved in the last quarter. Also, once the rate cut cycle begins, the spending power will also go up, which will help the economy.

But will banks reduce interest rates?

Banks are in a major dilemma this time as they will have to manage the credit-deposit ratio. On one side they cannot reduce interest rates on deposits, and without doing that they will not be able to reduce lending rates. The challenge is that the festival season is around. So not just people but corporates also are looking at the era of low interest rates. It will begin in the US soon, but India may take some more time.

As usual, I am adding here the top 5 stories of the week, trust you will find them meaningful.

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3. Digital transactions on ONDC will be collateral for credit providers, says T Koshy
4. PMAY 2.0 reduces home loan poaching by spreading subsidy over five years
5. How LIC, SBI Life, HDFC Life and others are gearing up for higher surrender value regime

Happy Reading.

Amol Dethe,

Editor,

ETBFSI.