Will Home Loan Interest Rates Fall Further?

Everyone has been speculating on further rate cuts, especially as the Reserve Bank Of India (RBI) governor Raghuram Rajan has recently said that the RBI has decided not to dismiss the possibility of a further rate cut.

Further rate cuts would be contingent on the monsoon, and domestic and global factors. As the monsoon is good this year, analysts expect food prices to fall further. With the monsoon and domestic factors being favorable, the RBI might cut the repo rate further if the monetary policy of the Federal Reserve falls in line with its agenda.

However, contrary to the present climate for rate cuts, the RBI governor Raghuram Rajan has always been known for his aversion to cutting the repurchase rate (repo rate) at which the central bank lends to commercial banks. In January 2015, when Raghuram Rajan cut the repo rate by 25 basis points, from 8% to 7.75%, it surprised policy analysts because the RBI had not cut the interest rate since May 2013.

Moreover, there is growing agreement among monetary policy experts that the central bank monetary policy should be predictable. Raghuram Rajan is one of those monetary policy experts who believe in central banks having a clear, consistent approach to monetary policy. But, the RBI has cut the interest rates twice since then, in March and June, by 25 basis points each. Now, the repo rate is 7.25.

The banks have followed suit after the RBI cut repo rates. The SBI chairperson recently said that there is further room for a rate cut. The SBI had led Indian banks in cutting home loan interest rates, lowering the cost of borrowing for home buyers. Recently, the SBI cut its interest rates, with a base lending rate of 9.7% for women home buyers. For male home buyers, the interest rate is 9.75%. This is a decline of 25 basis points in SBI home loans. Other banks had cut the interest rates too.

In the past two years, inflation in India has fallen to historically low levels by Indian standards. When Raghuram Rajan took charge as the RBI governor, the interest rates were in double digits even as many developed countries have had very low inflation levels for decades.

Though many argue that the RBI should cut the interest rates because other growth factors are impressive, this is largely because the government has changed the formula to calculate GDP growth rate. In March, the GDP growth rate was 7.4%, higher than the figure of 6.9%. But, according to the old methodology, the growth would be 5.5%, and this could be one of the reasons Raghuram Rajan may not appear too keen on rate cuts, despite the banks and industry urging him to cut rates.

Earlier, analysts had expected the RBI to cut the interest rate once in June, and then not cut at all.

But, with Rajan's recent announcement regarding the RBI not being averse to the idea of a further rate cut, speculations are rife. Further rate cuts would be contingent on the monsoon, and other domestic and global factors.

If this happens, home loan interest rates might fall further, making loans to buy apartments in India less expensive.