Aggressive open market operations of the Reserve Bank, interest of home and Car loans likely to fall soon

Mumbai, June 5: Strong signals are emerging in the bond market that rates of interest on home, car and consumer durable loans are likely to fall soon. In the last three months, yields on short-term instruments such as government’s Treasury Bills (T-Bills), commercial papers (CPs) and certificates of deposit (CDs) have shown a southward drift.

The main reason for this is Reserve Bank of India’s (RBI) aggressive open market operations (OMOs) in the last few months through which it pumped money into the system to ease the liquidity situation in the system.

According to one economist, decline in lending rates could be as much as 50 basis points (100 basis points = 1 percentage point) in coming months. The spoiler for rate cuts, however, could be the drying up of foreign fund flows due to the impact of Brexit and outflows due to dollar-denominated deposits by NRIs, also called FCNR (foreign currency non-resident) deposits, economists warned. As the liquidity situation improves and short-term rates soften, lenders will find it easy to get funds at cheaper rates for forward lending.

This, in turn, leads to lower rates of interest in the economy. Consider these: Since early May, net core liquidity requirement from the banking system fell from a high of Rs 1.06 lakh crore to a surplus of Rs 10,361 crore last week. In the short-term money market, the government’s 91-day T-bill rates fell from 6.90% in mid-April to 6.50% on Friday while the call money rates fell from about 6.40% in mid-April to 5.91% now.