RBI action: Brace up for a hike in your home loan rate

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There is no clarity on when the interest rates may start coming down and when home and car buyers can breathe easy. There is no clarity on when the interest rates may start coming down and when home and car buyers can breathe easy.
SummaryFor existing home loan borrowers, a part prepayment can offset impact of rate hikes in future.

The Reserve Bank of India on Friday surprised the market with a 25 basis points hike in the repo rate — at which the RBI lends to commercial banks — in its effort to tame the inflation which breached the 6 per cent mark to reach a six month high of 6.1 per cent in August. While the RBI Governor made it clear that repo rate would be the effective policy rate and would be consistent with the inflationary environment, there is no clarity on when the interest rates may start coming down and when home and car buyers can breathe easy.

The tone of the RBI seems more inclined towards fighting inflation than going for growth and since there are expectations that inflation is likely to remain higher on account of a likely hike in fuel prices, it raises some concern for existing and prospective home loan customers, and prospective car owners.

The State Bank of India raised its base rate by 10 basis points thereby raising its lending rate and also raised the interest offering on deposits by 0.25-1 percentage point across various maturities. The bank’s action came a day before the central bank was to announce its monetary policy.

Leading housing finance company HDFC too did not deny a hike in interest rates going forward. “We will wait and watch for the next few days on how the rates move and will take a call on the same,” said Keki Mistry, vice chairman and CEO, HDFC. He, however, added that he does not expect more repo rate hikes this fiscal and expects a correction in rates in the latter part of this fiscal.

There are others who feel that the tight liquidity environment will continue and lending rates will also firm up. “Liquidity will continue to remain tight and while lending rates are already very high, they will continue to remain high,” said Gagan Banga, CEO, Indiabulls Financial Services.

Home buyers and existing home loan customers may therefore brace up for a hike in rates by their bank or housing finance company as they may not be very far from raising their rates. Some feel that a hike in repo rates have added pressure on lending rates though not immediately.

“Clearly the cost of funds have been moving up in tandem with all the other macroeconomic factors that we are seeing around us. The current global and domestic macro economic scenario is

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