Considering the continued fluctuations on the interest rate front, it would be ideal to opt for floating rates, advises Balaji Rao
Every borrower’s eyes are always fixed on the RBI policy and the interest rate, particularly while taking home loans because every per cent saved leads to several hundred rupees of saving hard-earned money.
The RBI, on its part, keenly watches the inflation levels. It is good news when the inflation subsides for the economy as a whole as also for those who seek borrowings at cheaper rates.
In the last three years, due to high inflationary trends the lending rates had been as high as 12 per cent which drained out the common home loan borrower.
But thanks to a slew of measures by the government the inflation rate seems to have been tapering down below five per cent in the last few weeks.
In the RBI’s recent credit policy though the CRR rates were untouched the Repo & Reverse Repo rates were reduced, leading to softer interest rates.
With a tinge of uncertainty still hanging over the head of the RBI Governor he is not fully convinced about future rate cuts and has not made his stance clear on further softening of rates.
Over the last few months, the rates on new loans have come down by about 125 to 150 basis points, taking the rates down to a range of 10 to 10.75 per cent from the earlier 11.50 to 12.50 per cent.
Though the new borrowers benefit from this cut the existing borrowers are said to be paying the upwardly revised rates (increased during 2010-11/2011-12) and the benefits seem to have not been passed on to them.
The reason for this could be the cost at which the banks are borrowing from the market (other than from RBI) since the fixed deposit rates are still ruling at about nine per cent on a one-year deposit.
There are several other dynamics involved for banks to immediately pass on the rate cut benefit and the borrowers are hoping that sooner than later the increased rates would get reinstated to lower levels.
In the coming months, with a normal monsoon predictions for the year, the food prices are expected to be stable. This may lead to base inflation rates subsiding further and the RBI further reducing lending rates.
If this happens, banks / HFIs would be more than happy to let their loan book grow at a healthy pace and increase their lending activity.
Considering the continued fluctuations on the interest rate front it would be ideal to opt for floating rates than fixed rates which still look a very attractive option.