How A Normal Monsoon Could Lower Your Home Loan Interest Rates

Home loan interest rates are at a 15-year low right now, as India's central bank, through repetitive reductions, tries to boost consumer sentiment at a time when India's is predicted to enter a negative growth trajectory following the impact of the Coronavirus pandemic. If the predictions of a normal monsoon this year come true, interest rates would continue to remain low for a long time. 

You get home loans as cheap as 7.75 per cent currently.  

Read more: Loans To Get Cheaper As RBI Reduces Repo Rate To 4%

The RBI would have little scope to lower rates further if the rain Gods decide to play spoilsport. The pressure caused by an unfavourable weather condition might make it quite difficult to reduce rates any further.

How so?

Impact on agricultural output: Good rains lead to better agricultural output. Rain deficiency may cause a drought-like situation, adversely impacting agriculture produce. This would result in increased prices of food items, which account for nearly half the CPI.

Impact on inflation: Better supply of commodities results in lower prices and this keeps inflation in control. These numbers play a crucial role in the way the RBI decides on its key interest rates. Now, while the RBI wants to contain the inflation rate at four per cent and expects it to be in a comfortable range within this bracket, deficient rainfall would force food prices to go up, upsetting the overall scheme of things.

Good rains between June and September ensure that India is producing and supplying better and keeping prices of food items in check. If that is done, the central bank will have more headroom to reduce its key rates.

Impact on repo rate and home loans: The repo rate is the rate at which the RBI lends other financial institutions. A repo rate reduction means banks have easier access to funds and more scope to reduce their individual rates on their home-loan products. Under the marginal cost of funds-based lending rate (MCLR) regime, the interest rate that banks charge on their loan products, is linked to their cost of raising funds. So, when banks pass on the benefits of a reduced repo rate, buyers pay lower interest rates on their home loans.

Hence, the monsoon would decide whether or not homebuyers can see better days in terms of lower interest rates.

What should you do?

Interest rates are already at record lows ─ they have reached this level after 15  years. While the possibility of lower rates cannot be completely ruled out, the reverse is also true. In a scenario such as this, it would be a financially prudent move, to invest in property and opt for a fixed rate of interest on home loans.

What makes this an opportune moment to buy a house, is the fact that real estate developers are still sitting on a huge housing stock that they are desperate to sell.

Data available with PropTiger.com show developers in nine key markets of the country were sitting on an inventory pile amounting to 7.38 lakh units by June 2020. This provides the buyers a great chance to negotiate a sweet deal, for a ready-to-move-in home.

Also see: Coronavirus Pandemic: How Will It Affect Property Prices In India?