Home loan interest rates have become quite competitive and are ruling sub-10% ever since the Reserve Bank of India slashed the key policy rates from 7.75% to 6.65% in its last monetary policy announcement. The rate at which banks borrow from RBI (Repo) got cheaper, which brought down the borrowing cost as a consequence.
The lending institutions have passed on the benefit, to a large extent, to the borrowers, making borrowing cheaper compared to what it was a year or two ago. Though the rates for new borrowers have been ruling at comfortable and encouraging levels, it is not fully known whether the benefit has been passed on to existing borrowers as well. It would be a pity if the existing borrowers who are on floating rate option have not benefitted.
Come December 1, yet another monetary policy announcement is due, but this time around no rate cuts are expected to happen and moreover there is no room for further cuts. Since a calibrated approach would be the right methodology it would be regressive if the rates get cut further. Also to be noted is that the headline inflation has not made any great progress in its latest release of WPI and CPI data, with the prices of pulses and vegetables ruling at lifetime high levels.
Further, with the setting up of Monetary Policy Committee (MPC) that would have members from the Finance Ministry and the RBI, the decision henceforth would be an outcome of deliberations. The veto power of RBI to solely decide on interest rate has been clipped.
Though the money supply situation in the economy has been comfortable, inflation has been playing truant due to various reasons. The main culprit though is the below normal monsoon across the country in key agricultural belts which could have a telling effect on various sectors in the coming days and the inflation levels would be closely watched. Will the government be able to manage it deftly without hurting inflation and the interest rates, is a million dollar question.
Until the fiscal year’s last monetary policy due early next year, the rates are going to maintain their status quo. If inflation remains benign there would be room for a further cut, may be 0.25%, but looking at the situation such reductions are not expected to happen for a while.
New home loan borrowers should continue to choose floating rates and existing borrowers should start asking their lenders if the rate cut benefit has been passed on to them.
This article was originally published on www.thehindu.com dated November 27, 2015.
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