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Lending rates may fall as liquidity improves

In last couple of months, yields on short-term instruments have shown a southward drift

Policy Pulse
Publish Date: Jul 5 2016 9:47AM | Updated Date: Jul 5 2016 9:47AM

Lending rates may fall as liquidity improves

 A number of signs are emerging in the bond market that rates of interest on car, home and consumer durable loans may fall soon, a report in ‘The Times of India’ has said.

 
In last couple of months, yields on short-term instruments have shown a southward drift.
 
The key reason for this is RBI’s strong open market operations (OMOs) in the last few months with which it pumped up money into the system to ease liquidity situation in the system.
 
As per an economist, dip in lending rates could be as much as 50 basis points  in next few  months. 
 
However, spoiler for rate cuts, could be the drying up of foreign fund flows due to the influence of Brexit and outflows due to dollar-denominated deposits by NRIs, also called Foreign Currency Non-Resident (FCNR)deposits, warned economist.
 
As liquidity situation gets better and short-term rates soften, it will be easy for lenders to get funds at cheaper rates for forward lending.