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