RBI push, inflation to bring home loan rates down

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In the credit policy review on Tuesday last, the Reserve Bank of India (RBI) left all the key policy rates unchanged. The RBI left the repo (the rate at which the RBI lends money to banks), the reverse repo (the rate that the RBI offers when banks park funds with it) and the cash reserve ratio (fixed ratio of a bank's total deposit that it has to keep with the RBI) unchanged.
 

The RBI governor gave the indication of a grim economic outlook for the next few quarters. The GDP target was revised downwards to seven percent with a downward bias. However, the inflation target for this fiscal year was also revised downwards to three percent from an earlier projected target of seven percent.

Since the RBI kept the policy rates unchanged, it does not directly and immediately affect the home loan interest rates. However, analysts believe that home loan interest rates will see a decline in the short to medium terms from their current levels.

These are the reasons that are expected to trigger a decline in the home loan interest rates:

Lower inflation rate
Inflation has come down drastically to around 5.6 percent at present from its peak of 12.9 percent recorded in August last year. The RBI is expecting it to go down to around three percent over the next couple of months as the consumer price index (CPI) falls further. In that case, the RBI will have more room to cut the policy rates, and that in turn will have a direct influence on a further cut in home loan rates.

RBI encouraging banks to lend
Currently, consumer sentiments have dropped drastically due to the global economic slowdown. In the recent credit policy review, the RBI encouraged banks to increase the credit inflow in the economy by increasing the banks' credit target to 24 percent from 20 percent. The RBI also increased the money supply target to 19 percent from the current 16.5 to 17 percent levels. All this will put an indirect pressure on banks and result in lower home loan interest rates in the medium term.

Potential for banks to cut rates    
It takes a couple of quarters to feel the effects of monetary policy changes. Since the RBI had already cut the policy rates in the recent past, the RBI governor believes that there is further room for banks to cut rates in response to policy cuts it declared in the previous months. He believes banks will pass on this benefit to their existing and new customers in the near future, once there is more clarity on the long-term interest rate scenario. This is one of the reasons why he did not touch the policy rates this time.

What should borrowers do?    
Borrowers should track these factors to keep tabs on the movements of home loan interest rates. However, it is not very easy for them to keep waiting with their fingers crossed. These are policy decisions and many times they are influenced by governing bodies as well. What is more important from a borrower's point of view is to analyse various aspects of home loans and housing loan finance companies.
Some factors borrowers should analyse while applying for a home loan:

Charges    
You should get details of the various charges, fees and penalties that the bank will levy. You need to find out the charges you have to pay while taking the loan, during the loan tenure and at the time of termination of the loan.

Frequency of rate revision    

You have to determine the frequency, and triggers of revising home loans interest rates, over the last few years with the lender.

Repayment terms    

Access to the bank and easy repayment of installments is important. Also, check if you have the option to switch between a floating rate loan and a fixed rate loan, and the cost associated with it.

Check how flexible and supportive the bank is during upward and downward movements in interest rates. Find out if it is flexible on EMI payments based on the borrower's financial condition.