If you're planning to buy a home, there's good news around the corner. On Tuesday, the Reserve Bank of India (RBI) announced a long-awaited cut to its main interest rate, goading banks into reducing the cost of housing loans.
In its first rate cut in nine months, the RBI said it would lend to banks at 7.75% instead of 8%, enabling them in turn to offer cheaper loans for home, auto and corporate borrowers.
But existing home loan borrowers on floating rates should not expect their monthly instalment payments to fall immediately. Banks usually offer the lower interest rates to new customers.
What existing customers can do is to avail the option of pre-paying their current loans by borrowing from another bank offering the new, lower interest rates.The RBI also cut the cash reserve ratio (CRR) - or the proportion of their deposits banks have to park with the central bank - by 0.25 percentage points to 4%. This will leave banks with an additional Rs. 18,000 crore to lend to customers, also potentially spurring the housing market.
Public sector lender IDBI Bank announced a 0.25 percentage point cut in its lowest lending rate or base rate, a rate usually offered to bulk corporate borrowers, to 10.25 % effective from February 1.
Royal Bank of Scotland (RBS) became the first foreign bank to cut rates following the central bank move, shaving 0.75 percentage points off its rate to 9%.
Housing loan rates are usually 2 percentage points costlier than the base rate.
The flip side for retail savers could be a cut in the interest rates paid on fixed deposits, though banks were not forthcoming with their plans.
"We will keep a watch on the deposits side, but there will be cut on the lending side," said Chanda Kochhar, managing director and chief executive officer, ICICI Bank.
"One can expect a rate cut in about a week's time," said N Seshadri, executive director, Bank of India, referring to housing loans.
More rate cuts could be coming if prices continue to fall and RBI expects wholesale inflation to fall 6.8% by end-March from 7.18% in December.
"There is an increasing likelihood of inflation remaining range-bound around current levels going into 2013-2014," said RBI governor D Subbarao.
"This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks."
Stock markets, however, ignored the rate cut and reacted adversely to RBI's growth projections on the economy.
The BSE benchmark Sensex ended lower by 112.45 points, or 0.56%, to 19,990.90 after the RBI lowered India's GDP growth projection to 5.5% for 2012-13, down from its earlier forecast of 5.8%.