All you want to know about home loans and the road ahead!

Updated: Jan 7 2014, 18:41pm hrs
RBI policy rateRBI's announcement to keep key policy rates unchanged has triggered positive sentiment in home loan market. (Thinkstock)
The announcement by the Reserve Bank of India to keep its key policy rates unchanged has triggered a positive sentiment in the home loan market. With the RBI keeping the repo rate unchanged at 7.75 per cent, reverse repo rate at 6.75 per cent and the cash reserve ratio at 4 per cent, major banks including private and public sector banks have reduced home loan rates persuading home buyers to borrow. While the move to keep the policy rates unchanged has been welcomed by the real estate sector facing sluggish sales, financial experts believe that the rising inflation rates may force the RBI to take a completely different position in their next meeting in January 2014. Let us take a look at the way lending rates for loans have panned out in the current year and expectations from 2014.

Understanding Repo Rates, Reverse Repo Rate and CRR: Before understanding how the RBI's monetary policy affects loan interest rates, it is essential to understand repo rate and CRR figures. Simply speaking repo rate is the rate at which the Reserve Bank of India lends money to various commercial banks. All commercial banks need to deposit a minimum amount of money with the Reserve bank of India as bank deposits known as the CRR or cash reserve ratio. Reverse repo rate as the name suggests is the rate at which RBI borrows money from commercial banks. Most commercial banks are happy to lend money to the RBI in an economic scenario of higher reverse repo rates. RBI uses the reverse repo rate as a tool to drain out access money from the banking system if necessary. Repo Rates and CRR when lowered offer a positive market sentiment for banks to offer low interest loans. The downside of cheaper loan interest rates is that the fixed deposit rates also get proportionally lower to balance the overall financial market equilibrium.

How Repo Rate Cut Impacts Loans: Any cut in the repo rate is good news for the borrowers as banks pas on the lower interest rates they are being charged by the RBI to the last end consumer. When the banks cut the loan rates, usually older borrowers do not get the benefits which are limited to new borrowers. Unless the banks cut the base rates for the loans in which case all older borrowers can also avail the benefits of lower interest rates on older loans taken at higher interest.

Loan Trends in 2013: The year has been topsy-turvy with the RBI walking a thin line between its monetary policy to inject liquidity into the system and rising retail inflation. The year started by RBI cutting down repo rates and cash reserve ratio by 25 basis points leading to lower interest rates. However the rising inflation made sure the monetary policy kept changing at every review. The Reserve Bank of India has then forced to hike the policy rates by 25 basis points in September and followed the same in October leading to a hike in overall interest rates.

December Monetary Policy and Loan Trends: The third and fourth quarter are interesting periods as most banks and non banking financial companies lower interest rates to ride the festive season market trends. In October, State Bank of India, the country's largest public sector bank SBI had reduced interest rates on loans for car and consumer durables to counter the festival season demand. With the RBI refraining from rising repo rates in its monetary policy review for now, Banks have now passed on the befits to their customers offering lower interest rates. The lower interest rates help the banks to boost credit growth while customers get the benefits of lower interest rates.

Possible Home Loan market Sentiment in 2014: With 2014 just round the corner, the opinion is still divided on the RBI's monetary policy. One thing is for certain that if retail inflation continues to rise, the RBI would be forced to hike policy rates by a minimum of 50 basis points. In such a scenario, loans in 2014 might get costlier. Owing to a good monsoon in 2014, the inflation is likely to reduce its grasp which may translate to lower repo rates and interest rates for borrowers in the middle of the year. So if you are seeking a loan, the current interest rates are quite lucrative or one may have to wait for period of five to six months to avail competitive interest rates.