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Will interest rates on home loans decrease or increase?

The movement of interest rates is unpredictable and we know not where it moves.

Pooja Gawde

13 Jun 2008

Interest rate, this is the key focus of a loan consumer when he is looking at the terms and conditions in the loan agreement. In the year 2007, interest rate fluctuated every now and then.

If we look at the interest rate movement in 2007, the alternating jump and slide play started somewhere after August-September 2007. Till then, a revision meant one that was on the upward side of the scale.

It was not long before the lending business of the banks took a hit and they had to find ways and means to get borrowers on their side. By September 2007, most banks offered home loans at reduced interest rates to new borrowers. Whether the reduction came through as a festival discount or with a stated objective to boost business, it was play time for the loan consumers, till about March 2008.

Going back a little, let's go to the beginning of the calendar year 2008. Active reduction of home loan rates came to a standstill by the beginning of the year. Banks seem be making their stance clear- any reduction of rates will be made on Reserve Bank of India's (RBI) signal.

The signal could have come, but for a few obstacles. In 2007, loan default seemed to be a cause of constant worry to the banks. The hapless consumers who were burdened with extra EMIs due to the frequent rate revision showed signs of bucking down, personal loans and credit cards being the worst hit as expected.

Inflation showed no signs of cooling down so much so that inflation climbed to 7.61 per cent by the end of April 2008.

To reiterate, the movement of interest rates is unpredictable and we know not where it moves...

As far the interest rates are concerned, the picture may be a shade brighter.

In its annual credit policy meeting, the RBI said that the banks may not increase interest rates for loan consumers.

One of the steps taken in the direction of helping banks to achieve the objective seems to be is to leave all the key rates except the cash reserve ratio (CRR) untouched. The CRR was hiked in the recent meet to 8.25 per cent.

Though ideally this hike could have trigged an immediate increase in interest rates, reduction of risk weigtage on home loans can be seen as one of the reasons for stalling such a development.

The RBI has reduced the risk weightage on home loans up to Rs. 30 lakh. This means that now banks have to set aside about 50 per cent capital on home loans above Rs. 20 lakh and upto Rs 30 lakh. The capital required to be set aside earlier was 100 per cent. RBI also said that the banks may want to pass on this benefit of reduction to the home loan consumers through lower interest rates. Well, you may have to face a little disappointment here.

Reducing interest rates is an individual decision of every bank based on its asset and liabilities equation. So, in a short-term basis, the least that can be expected is stagnation in interest rates. There are many other reasons which contribute to any movement in interest rate, and risk weight is just one of them. So, much of downslide in rates cannot be expected.

So, what do we expect for the future? This remains to be seen.