Wednesday, January 26, 2011

Be prepared to shell out double digit interest rates soon

Planning to take a home loan? Be prepared to shell out double digit interest rates soon. Lenders say it’s only a matter of time before they are forced to pass on higher cost of funds to borrowers after the Reserve Bank of India increased key policy rates by 25 basis points on Tuesday.

Deepak Parekh on the staircase
Deepak Parekh, HDFC

The rate hike, the seventh successive one since January 2010, is aimed at controlling inflation which the RBI described as a “dominant concern”. The rate of inflation as measured by the wholesale price index is now forecast to be at 7% by end-March, much higher than the original estimate of 5%.

At present, new borrowers get loans at close to 9.5%. But borrowers who have availed of home loans around five years back are already paying over 12% following successive increases in prime lending rates.

The increase in policy rates may seem modest. But banks are already in deficit mode and borrowing over Rs 1 lakh crore from RBI on a daily basis. “The liquidity situation is very tight and the cost of funds has gone up for all. Interest rates on home loans would also go up to double digits,” said HDFC chairman Deepak Parekh. He pointed out that top corporates were already borrowing at 10% and more.

Higher interest rates should be good news for depositors, though their enthusiasm for fixed deposits is likely to wane since inflationary expectations could discourage savings. However, rising interest rates could restrain real estate prices in the medium term by tempering demand.
Home loan rates set to move into double digits

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