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Credit Policy: Home loan interest rates likely to remain stable

Despite Reserve Bank of India's (RBI) money tightening measures, home loan and personal loan rates are likely to remain flat. Most bankers expect interest rates to remain stable.

Harsh Roongta

14 Aug 2007

Despite the Reserve Bank of India's (RBI) money tightening measures, home loan and personal loan interest rates are likely to remain flat. Most bankers expect interest rates to remain stable.

Banks have to keep a portion of their cash reserves with the RBI as per a ratio called the cash reserve ratio (CRR). Recently, in its quarterly review of credit policy, the RBI increased CRR from 6.5% to 7%, which effectively means banks have to keep a larger share of their reserves with RBI. Despite the initial fears, it is not expected that the RBI move will jack up interest rates.

One of the reasons why the current liquidity tightening measures will not drive up interest rates is that many banks were planning to reduce rates further on home loans, personal loans and fixed deposits. Now, those plans will be on hold for at least three months, say bankers. Some banks had reduced home loan rates by 25 to 50 basis points last month.

ICICI Bank, which had raised its floating home loan rate by 3 percentage points to 12 per cent over a one-year period till May 2007, recently dropped it to 11 per cent. HDFC too brought down home loan interest rates to 11 per cent as a special monsoon offer, which it extended for one more month till August 15, 2007.   

"It is too early to talk about the impact of the CRR hike. But I can definitely say that at present, there will not be any reflection of it on current interest rates, be it in the retail or other sectors. The CRR hike was essentially to mop up the liquidity in the system,\" said a Standard Chartered Bank official.

Bankers are willing to wait out for a few weeks to get a clearer picture. "The trigger to increase the CRR is the current liquidity in the market. Speaking about its impact, banks are unlikely to raise interest on a short-term basis", said a State Bank of India official.

The current phase of monetary policy tightening began in September 2004. The CRR changed five times, increasing from 4.5 to 6.5 per cent. In the latest policy announcement, key interest rates like repo rate and reverse repo rates have not been untouched. However, since September 2004, the reverse repo rate rose six times and the repo rate rose seven times-from 6 to 7.75 per cent. In 2007, banks raised their lending rates in response to an increase in repo/reverse repo rates.