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Homeless? Congrats

After RBI’s efforts to rein in inflation, it makes more sense to rent a house, reports BS Srinivasalu Reddy and Sandeep Singh.

business Updated: Jul 30, 2008 01:07 IST

If you haven’t bought a house of your own yet, or feel priced out of the market now, there may be some good news in store. Home loan rates are set to rise again, while realty prices head for a bigger-than-expected fall. The result: paying rent just got smarter.

That’s one way of looking at the brighter side of Reserve Bank of India’s credit policy on Tuesday, which, otherwise, painted a gloomier picture of the economy and brought such measures that would make the slowdown worse than now.

The central bank raised the rate at which it lends to commercial banks in the short term, and ordered them to hold more cash in reserves, in a bid to contain inflation that has reached a worrisome 12 per cent and threatens to derail the India growth story.

This is the second time in just over a month that RBI has increased the repo rate — now at 9 per cent. The hike coupled with increased cash reserve ratio — the share of deposits that banks must keep with RBI, which would also increase to 9 per cent — will push up cost of funds for commercial banks and force them to increase.

Bankers said lending rates on almost every thing, from home loans to consumer and auto finance, would rise again — many banks raised their rates only a few weeks ago. “We may have to raise 50 basis points (0.5 percentage point) in lending rates,” said T.S. Narayanasami, chairman of Bank of India.

For millions of home loan borrowers, the RBI's decision is a double whammy as they fork out more in EMIs even as their household budgets reel under rising inflation.

But for those, who have yet to own a house on loan, it would be good to continue with rented accommodation for some time, because you will have to pay much more in interest now than in rent.

Paying more in interest than in rent makes sense only when property prices are rising. The scenario now is just the opposite.