/With spike in gilt yields, FD rates inch up too

With spike in gilt yields, FD rates inch up too

(This story originally appeared in on Mar 06, 2021)

MUMBAI: Even as yields on gilts rise and borrowers hold back on their fresh bond issues, banks are reducing rates on home loans. ICICI Bank is the latest to cut home loan rates to 6.7%, which is only about 0.5% higher that the government’s cost of borrowing. But there are hints of upward pressure on interest rate with some banks and NBFCs hiking fixed deposit (FD) rates.

Consider this: The spread between home loan rates and government borrowing rates has narrowed to the lowest in history with yields on the 10-year bond rising to 6.23%, which is currently less than 50 basis points (100bps = 1 percentage point) below the best home loan rate.


Of late, yields on bonds have risen globally after the US Federal Reserve chairman said he did not see the need for intervention and inflation could rise as the economy revives. On Friday in India, the yield on the 10-year benchmark rose to 6.26% intraday — nearly an 11-month high. And as the RBI and bond traders are involved in a tug-of-war on yields, in Friday’s weekly bond auction, gilts worth about Rs 19,400 crore of the total Rs 32,000 crore on offer devolved on primary dealers, RBI data showed.

Alarmed by the increase in bond yields, Indian Railways Finance Corporation and National Cooperative Development Corporation cancelled bond issues. However, even as bond yields surged, ICICI Bank joined SBI, Kotak and HDFC in cutting home loan rates. The private lender said that it has reduced rates on home loans of up to Rs 75 lakh to 6.7%, and 6.75% for above Rs 75 lakh. “We see resurgence in demand from consumers, who want to buy homes for their own consumption in the past few months,” said ICICI Bank head (secured assets) Ravi Narayanan.

Anticipating growing demand for credit, some lenders are offering better returns to depositors. Bajaj Finance is one of the few issuers which have recently tweaked interest rates on FDs. It now offers returns up to 7.25% for senior citizens. HDFC and PNB too have raised deposit rates recently.

While an increase in returns is good for senior citizens as well as those saving for their retirement through EPFO, it could hurt equity markets. “Bond markets have started showing nervousness about sharply rising commodity prices, especially crude. The equity rally, which started in April 2020, has broad underlying assumptions of easy liquidity plus large fiscal stimulus without significant uptick in inflation. Rising yields may queer the pitch and trigger a selloff in global equities,” said Quantum Mutual Fund’s fund manager Nilesh Shetty.

The positive in the macro fund is on the foreign exchange front. Hitherto, the RBI had been under pressure to buy dollars. “The trade deficit is edging back up to pre-pandemic levels. The resultant shrinkage in the balance of payments surplus in 2021 could mean that the RBI may not have to buy as many dollars, providing it some degrees of freedom as it juggles between its objectives on inflation, the rupee, and bond yields,” said HSBC India chief India economist Pranjul Bhandari.

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