Why April inflation could mean lower home loan EMIs

NDTV Profit Desk

14 May 2013, 04:15 PM IST

Inflation eases: Interest rates on home loans have remained in double digits over the last three years on the back of the Reserve Bank's war against inflation. With inflation slipping to 40-month low, a cut in interest rates looks a certainty.
Outlook may change: The RBI has been cutting the repo rate (the rate at which it lends shot-term money to banks against securities) in the past too, but because its tone has been disappointing and extremely cautious, bankers have chosen to stay cautious. Now that inflation is in the Reserve Bank's comfort zone, the central bank's hawkish tone might change. A softening in Reserve Bank's outlook will give more confidence to bankers to lower rates.
Large room for repo rate cuts: While inflation has eased to as low as November 2009, repo rates continue to be comparatively high. In November 2009, the repo rate was 4.75 per cent as compared to 7.25 per cent as of today. If inflation continues to ease, the repo rate will come down sharply and borrowing from the Reserve Bank will become less expensive, enabling banks to lower rates.
Global investment bank Barclays says rate cuts of 75 basis points by the end of the year remain possible. This means the repo rate may come to 6.5 per cent by end-2013, leading to significant lowering of retail loan rates. On an average, a 0.25 per cent cut in interest rate on a Rs. 50 lakh home loan for 20 years translates into minimum savings of Rs. 800 per month.
Cash Reserve Ratio may also be cut: Some experts say the RBI will not cut rates as early as June because of widening trade deficit and high retail inflation, which is still above 9 per cent. In that case, global investment bank Nomura expects the central bank to cut the CRR, which should immediately translate into a rate cut. A cut in the CRR, which is the amount of money banks have to park with the RBI, leads to immediate release of liquidity enabling banks to cut rates without a lag.