Has anything changed since the Reserve Bank of India announced no change in key rate on Wednesday for banks to come out with lower rates on home loans? Absolutely not. This is no signal to show rates are falling but a mere feel-good move following expectation of a 25 basis points (bps) hike in key rate that did not occur. Banks were mentally gearing up for a higher cost of funds following food inflation. The consumer price index of 11.24 per cent had led many banks to factor in a higher rate emerging from RBI’s policy review. But with key repo rate — the rate at which banks can get funds by pledging government securities with the RBI — being unchanged at 7.75 per cent, they are now relieved.
Two banks have reduced home loan rates following RBI’s review. HDFC has opened up a new window up to January 30 with its new (lower) rate of 10.25 per cent from 10.75 per cent, while government-owned State Bank of India has lowered rates to 10.10 per cent for women and 10.15 per cent for men from 10.5 per cent. However, the rates are floating, meaning they could rise if circumstances demand. This move does not imply that there could be a rush for housing loans nor translate into higher sales of apartments.
The fundamentals of the economy remain a concern — lower disposable incomes, inflation and unreasonable higher rates of property. Inflation currently is largely driven by food, and consequently looks to be here to stay until food supplies improve. The current rabi season between end January and mid-February will therefore be closely watched for supply improvements in cereals, wheat and coarse crop, like bajra, ragi, soya, to name a few. If this is a success, food inflation will likely ease. However, what could push up rates in future is the uncertainty on external factors like rupee depreciation, global crude prices and the US Federal Reserve’s approach towards its bond-buying programme. As of now, the Fed infuses $85 billion a month into the system, a chunk of which finds its way into Indian equity markets. The Fed has now lowered this liquidity infusion in bond-buying or quantitative easing (QE) as it is commonly called, to $75 billion from January.
One of the key reasons for the move is the improvement in the US economy. If the Fed goes for a steeper QE, then it indicates an improving US economy and a brighter chance of increasing consumption spends by US citizens. This in turn converts to better demand for Indian goods, therefore improvement in exports. Secondly, if global oil trends higher, it could probably offset the gains on exports and therefore currency depreciation risks and a wider current deficit. The rupee is at 62.07 to the dollar, but further weakening or firming is purely market driven and beyond anyone’s control.
The fear that lurks currently is whether have we have moved on from the current food inflation, which is supply-led, to demand-led inflation caused by these external factors. But the time is ripe to borrow at 10.25 per cent, then lend (deposits) where even the best deposit rate is 9.25 per cent.