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Home loan to cost more

With the RBI signaling a quarter per cent increase in the short-term interest rate, home loan interest rates are expected to go up by 0.25 per cent to 0.50 per cent.
By Arun Kumar | None, New Delhi
PUBLISHED ON JAN 25, 2006 02:29 AM IST

With the RBI signaling a quarter per cent increase in the short-term interest rate, home loan interest rates are expected to go up by 0.25 per cent to 0.50 per cent.

Since there is already pressure on the deposit rate after the redemption of India Millennium Deposit (IMD) of Rs 30,000 crore, bankers feel short-term rates are bound to go up in the medium term as there is pressure on the cost of deposits.

ICICI Bank executive director Chanda Kochar agreed that there is an upward bias on interest rates. "We will watch the scenario for sometime before taking a decision," she said.
Punjab National Bank chairman and managing director S.P. Gupta said there is pressure on the deposit rate. "However, PNB does not intend to increase its lending rate till March 31. After that we will evaluate the scenario," he said.
 
Another leading banker said some of the new generation banks and even SBI have already increased the deposit rate in the recent past and are expected to increase it further, which would impact the loan market.

Currently, the variable interest rate on home loan ranges between 7.75 per cent and 8.25 per cent, depending upon the time and size of the loans. The fixed rate is around 8.5 per cent.
Bankers feel in the current scenario where liquidity is under pressure, bankers are left with little option but to pass on the burden to consumers. This includes retail as well as corporate loans. In fact, ICICI Bank has recently increased its long-term prime lending rates.

"In order to increase their exposure in the retail segment, some of the banks have reduced the lending rates substantially, now they are feeling the pinch and will have to harden the rates," said another banker.

The RBI has raised short-term interest rates in an attempt to curb inflation. The Central Bank also lifted its GDP growth forecast for financial year 2006, from 7-7.5% to 7.5-8%. Though worried about the prospects of an upward pressure on inflation, the RBI maintained its annual target of 5-5.5 per cent.

It has decided to increase the fixed reverse repo rate by 25 basis points from 5.25 per cent to 5.50 per cent. Since the repo rate will continue to be linked to the reverse repo rate and the spread between the reverse repo rate and the repo rate has been retained at 100 basis points, the fixed repo rate would be 6.50 per cent.

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