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Guest Blog: Rate cuts will help people buy affordable homes

 

NIRANJAN HIRANANDANI | New Delhi, April 17, 2012 16:21
Tags : reserve bank of india | rbi rate cuts | repo rates | home loans | affordable homes |
 

niranjan hiranandaniThe Reserve Bank of India's (RBI) move to cut its policy repo rate by 50 basis points is a welcome surprise for the real estate sector. We feel that RBI will continue to cut the repo rates further. The direct fallout of cutting repo rate by 50 bps on the sector will be that home loan rates will come down.

Moreover, pre-payment charges for home loans are now withdrawn. This means, that if somebody prepays the loans, there cannot be any pre-payment charges. However, the fundamentals of the real estate sector will not drastically change with the RBI move. With the RBI's announcement of reduction in interest rates on home loans, there is now a possibility of people buying affordable homes and it will initiate positive sentiments to take more home loans. Though many banks have, in the recent past, voluntarily abolished the pre-payment penalties on their floating rate home loans, there is a need for ensuring uniformity across the banking system in this regard.



RBI's move comes at a time when there has been a decline in average inflation levels by over 150 bps compared to FY2011 and FY2012, thus creating headroom for interest rates to come down. So, I would expect even broader lending and deposit rates to inch down by 50 bps in the coming months, as lower inflation enables higher financial savings and improving liquidity conditions for banks.

Interestingly, in order to keep inflation expectations anchored, the RBI has appropriately also kept inflation within its control, pointing out that potential GDP growth is likely to be closer to 7.5%. So, I feel that the overall headroom for interest rates to come down is likely to be a moderate 75-100 bps over the course of the year, which itself is a major positive for the overall corporate earnings growth outlook, especially for banks and infrastructure.

 
(Disclaimer: The views expressed in the blog are that of the author and does not necessarily reflect the editorial policy of The Sunday Indian)
 
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