- Wealth PMS (50L+)
HDFC Bank and ICICI Bank have both hiked up lending rates by about 50 bps, says ET. This takes ICICI’s base rate to 8.25% and HDFC Bank’s base rate to 8.2%. Banks can’t lend below the base rate. Most existing customer loans are linked to a "Benchmark Prime Lending Rate" (BPLR) which has also been raised appropriately.
The commercial paper (CP) and Certificates of Deposit (CD) markets seem to have gone berserk; government owned bank CDs are trading above 10% yields.
The chart above is symbolic. Beyond about 50 days nearly all trades are happening at the 9.5% to 10% levels, and above 150 days everything’s above 10%. In that context, fixed deposit rates have a while to go.
Bonds, though showed a softening on prices; the kinda-sorta 10 year bond of 2022 (we don’t have a REAL 10 year bond) is at 8.105%, which is lower than the 8.20%+ it has been at recently. Even corporate bonds at the 10 year horizons are quoting below 10% yields.
Inverted yield curve? That means short term money – less than a year – is more valuable than longer term money? Even SBI’s recent bond offer – at 9.95% for 15 years, has seen enormous interest, despite local banks offering just as much for shorter tenures. People are of the strong belief that rates will come down from here, at least in the 1 year+ horizon. Time will tell if they are right.
This sounds ominously like the events post 2005 in the US. Rates were rising. There were a ton of loans made at fixed rate that would be "reset" in two years. And , in 2007, when it was time to reset the rate, the floor fell out of the real estate market (and later, every other market). I hope we don’t go there.
What you might want to do with the SBI bond, if demand continues, is to make listing gains and walk away. I would assume that with money this tight, other bank offers will go beyond 10% for retail fixed deposits very soon.
You might want to brush up on bond yields with our 9 minute video: Bond Yields (Short Take).