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Home loan rates to fall

RBI’s credit policy, to be declared, is expected to cut the rates at which it lends money to banks, reports B.S. Srinivasalu Reddy.

business Updated: Jan 29, 2008 00:37 IST
B.S. Srinivasalu Reddy

Home loan rates are set to head south. The Reserve Bank of India’s (RBI’s) credit policy, to be declared on Tuesday, is expected to cut the rates at which it lends money to banks, who in turn will pass on the benefit to those who have taken home or personal loans from them.
Analysts say banks will cut loan rates even if the RBI doesn’t cut its rates immediately, but simply hints at it in the near future.

Industry watchers expect the RBI to take a cue from the US Federal Reserve, which had cut rates by 0.75 per cent to stave off recession. They expect the RBI to shave 0.25 per cent off its rates. “The RBI is also expected to keep steady the cash reserve ratio — the percentage of deposits banks are expected to keep in reserve — at 7.5 per cent,” said A. Prasanna of ICICI Securities.

Banks are flush with cash at the moment, which is another reason analysts are confident loan rates will fall. RBI data shows credit growth was at 22.2 per cent so far this fiscal, compared to 31.9 per cent last year, while deposit growth rose to 23 per cent from 21.5 per cent.

Sachchidanand Shukla, economist at Enam Securities, said: “The other indicator is that leading lenders like ICICI and HDFC have extended their Diwali offers on loans up to January-end. They could not cut them earlier because of the fear of a cash reserve ratio hike.”

So, what could stop the RBI from cutting rates? Primarily, it's the fear that it could be interpreted as a departure from the discipline of a tight monetary policy over the last four years, which has served the economy well.

“So, even if the RBI does not cut rates right away, the trend points to cuts soon enough,” said D.K. Joshi, director and principal economist at industry rating agency CRISIL.