Ravi Karandeekar's Pune Real Estate Investment Blog: RBI addresses the last factor that has been exerting upward pressure on home loans interest rates

Tuesday, October 7, 2008

RBI addresses the last factor that has been exerting upward pressure on home loans interest rates - reduces CRR to impart liquidity

Is this an incentive to go for a floating-rate home loan?

Floating interest rate - fear and incentive:

I can understand the sentiments of the builder when he welcomes the RBI's move but when HDFC chairman Deepak Parekh and ICICI Bank Jt managing director Chanda Kochhar do not even suggest anything about it's impact on floating interest rates why ET Bureau says "there is even more incentive to go for a floating-rate loan."?

What do you think? Are we going to fear less of floating interest from October 11? If yes, for how long? Please, let me know in the comments. (Please, read the comments policy of Ravi Karandeekar's blogs.)

Home loans at high interest rates:

This is as high as it gets as far as home loans are concerned. Bankers are calling it a peak on interest rates, with the Reserve Bank of India (RBI) reducing cash reserve ratio (CRR) to impart liquidity.

Inflation, oil prices and liquidity:

The move addresses the one remaining factor that has been exerting upward pressure on rates. Inflation and oil prices — the two other main drivers of interest rates — have already shown signs of easing.

Observations HDFC chairman Deepak Parekh!

“Oil prices are coming down and inflation has moderated. Liquidity was an issue and this move by RBI will infuse liquidity. I am hoping that interest rates have peaked,” said HDFC chairman Deepak Parekh.

HDFC’s floating rate loans are available at 11.75%, while the interest on fixed-rate loans is around 14%. Floating-rate loans by some state-owned banks are cheaper, but they are going slow on advances.

Rs 20,000 crore will ease the extreme credit crunch:

RBI’s CRR cut, which comes into effect on October 11, will release Rs 20,000 crore. Bankers are hopeful that this will ease the extreme credit crunch that had resulted in many banks cutting any form of funding to corporates. The credit crunch, which was a fallout of foreign investors pulling out funds, was precipitated by RBI measures and would have worsened this quarter because of an increase in government borrowing.

Only an ad hoc measure:

ICICI Bank Jt managing director Chanda Kochhar said the move would bring down pressure on short-term borrowing rates. She was, however, unwilling to take a long-term view on interest rates, as the measures were described as ad hoc by the central bank. She added no other rates would change on account of the CRR cut.

Interest rates - lurking fear:

The uncertainty over interest rates had pushed up the differential between fixed and variable loans to over 3.25 percentage points. While this difference was enough for any borrower to go for a floating-rate loan, there was always a lurking fear that interest rates could rise further. Now, with RBI reducing pressure on liquidity, there is even more incentive to go for a floating-rate loan.
-The Economic Times

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