Time to tighten your belts

K. Sukumaran
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The RBI credit policy has potential for rise in interest rates, and housing cannot be an exception, saysK. Sukumaran

Yet another annual credit policy has been released by the Reserve Bank of India Governor D. Subba Rao. It is a document which contains references to the following:

* State of the economy

* Money supply position and estimate for increase/decrease there of.

* Bank Rate - the guiding interest rate for commercial banks to follow.

* Cash Reserve Ratio (CRR), the rate at which the banks have to maintain liquid cash with them/RBI, and Statutory Liquidity Ratio (SLR) investments in approved securities.

* Overall liquidity management .

Factors underlining the present monetary and credit policy:

*Credit growth to infrastructure has been robust.

*Lendings by commercial banks and other financial institutions to commercial real estate has accelerated.

* Weighted average lending rates in the Indian banking system was 10.5 per cent at the end of March 2010 (10.3 per cent by 2011 March-end), which is projected to go up in the coming financial year.

*The Base Rate of banks introduced from July 1, 2010, to replace the Prime Lending Rate, went up by 50-165 points between October 2010 and March 2011, covering 98 per cent of lendings by 64 major banks.

*It is necessary to maintain an interest rate environment that moderates inflation expectations.

* Environment of price stability to be maintained which will be conducive for sustaining growth in the medium term.

* Liquidity to be not of large surplus or deficit.

Salient features of the credit policy for 2011-12:


1. Rising global commodity prices including oil which may at best remain firm or increase further over another year or so. 2. Already high inflation, which is currently around nine per cent, will persist and may become worse.

3. Moderation in demand may help price reduction.

Policy announcements

a) No change in the Bank Rate and CRR/SLR rates

b) Repo rate to go up by 50 basis points from 6.75 to 7.25 per cent

c) Reverse repo rate to be increased from 5.75 to 6.25 per cent

(The repo rate is the rate at which the RBI lends moneys to banks and reverse repo is the rate at which the RBI accepts surplus moneys from banks).

d) Interest payable on savings bank deposits increased from 3.5 to 4 per cent.

The above directives will increase the cost of funds to banks. The repo rates were subjected to an earlier increase at the end of January, apart from such increases over the last 12 months when the inflation control policy was in force and bank lending rates too went up in tandem.

Effect of the present credit policy, which is also subjected to quarterly reviews:

Many banks have already jacked up the lending rates. Coming to housing loans, the Housing Development and Finance Corporation (HDFC), the largest housing finance bank in the country, has raised the lending rates as under:

@ Across the board raise of 50 basis points.

@interest on housing loan up to Rs. 30 lakh will be 10.25 per cent (floating)

@Interest on loans from Rs. 30,00,001 to Rs. 75 lakh will be 10.5 per cent

@ Interest on housing loans above Rs. 75 lakh will be 11 per cent

The HDFC had earlier raised the rates by 25 basis points from February 1, 2011.

The SBI, another massive lender to housing, has raised the interest by 75 basis points. This was after withdrawing its much publicised concessional teaser rates last month.

Other major banks which increased housing loan rates are Punjab National Bank, ICICI, Oriental Bank and Corporation Bank. Many other banks are reported to be completing the administrative formalities for raising their interest rates.

Another development is the revision in deposit rates by some banks which will jack up the cost of funds.


All the above indicate that it can be reasonably expected that during the next one year the trend will be to place housing loan rates in general at higher levels. Some relief can be the Union Budget focus on housing and infrastructure and the reported high housing targets in the next Five Year Plan, which need to be followed up by moderating the cost of borrowings so that the targets can be achieved.

Let us hope that the measures likely to be recommended by the Group of Ministers for controlling inflation will be practical and enforceable.



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