Home-loan customers may have a tough time on account of the continuing anti-inflationary monetary policy of the Reserve Bank of India (RBI). Many fear that Tuesday's announcement by the RBI that the repo rate (the rate at which it lends short-term money to banks) was being increased by 25 basis points with immediate effect may force banks to increase the lending rates by at least by 50 basis points.

The increase in the repo rate from 8.25 to 8.5 per cent is the 13th since March 2010 with the RBI adopting the anti-inflationary policy. However, most banks have adopted a “wait-and-watch” policy, as many believe that this will possibly be the last in the current series of repo rate hikes. The RBI, while making the announcement, indicated that inflation would come down by December.

“Banks are watching the impact of the policy rate to take appropriate action in the days to come,” K.K. Ajithkumar, Deputy General Manager, Federal Bank, Aluva, says.

At the same time, some bankers believe that scaling up the repo rate has not been an effective tool to curb inflation. The incremental increases have not brought in the desired effect. Besides, it will curtail growth in the vital sectors of the economy, including the construction sector, they say.

For some time, with the steady rise in the repo rate, home loan customers have been hit hard. The equated monthly instalments (EMIs) have increased by 3-4 per cent in the past year. Banks have no option but to increase the EMI in tune with the policy rates, bankers say.

The RBI indication that the recent repo rate hike is the last one in the current series however does not guarantee that there will be no increase in the lending rates. Moreover, home-loan applicants will find it difficult to convince banks to give them a loan, a senior official says. Inflation was not as high as now when banks went about increasing the lending rates from late-2007 to the beginning of 2009. But when the economy went into a slump, customers got benefits when the banks reduced the interest rates.

Subsidy cap

The only solace for a section of borrowers now is the decision of the Union Cabinet to relax the norms under the one per cent subsidy scheme for housing loans. Now the subsidy will be available for loans up to Rs.15 lakh. Earlier, the interest subsidy was for loans up to Rs.10 lakh. The eligibility criterion for the subsidy scheme has been extended for houses priced up to Rs.25 lakh. Previously, the scheme was available for houses that cost less than Rs.20 lakh.

Mr. Ajithkumar says customers will benefit with the RBI deciding to deregulate the interest rate for savings bank deposit. Banks will be free to determine their rates. But each bank has to offer a uniform interest rate on savings bank deposits up to Rs.1 lakh.

This will spur competition among banks scouting for depositors. Already one of the banks, responding to the RBI deregulation, has increased the interest rate to almost 6 per cent. Six months ago, the RBI increased the interest rate on savings bank deposits to 4 per cent from 3.5 per cent, he adds.