The Telegraph
Since 1st March, 1999
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Hike knock on floating-rate home loan

Mumbai, July 23: Holders of floating rate home loans may feel the interest pinch from this week.

The market is widely expecting a rise in reverse repo and repo rates by 25 basis points each in Tuesday’s credit policy. The take is reverse repo will be raised by RBI to 6 per cent and repo to 7 per cent. (The central bank mops up liquidity with banks through the reverse repo, while it injects cash via the repo.)The RBI, on June 8, surprised the market when it raised both the rates by quarter percentage points, prompting ICICI Bank to raise the rates on home loans by 50 basis points across the board.

HDFC chairman Deepak Parekh has been quoted as saying that if the Reserve Bank raises rates, the bank would make loans costlier by the end of this month. Home loan rates are expected to rise further as the cost of funds has gone up by 25 basis points in the last quarter, he said.

HDFC raised rates by half-a-percentage point in May. The floating rate went up to 8.50 per cent and fixed rate to 9.75 per cent.

The possibility of rates hardening further may force borrowers to switch over to fixed rates. Industry circles are, however, opposing this.

“The difference between a fixed and a floating rate loan has increased from 50 basis points to over 1.25 percentage points. Therefore, it is not advisable to change. Further, the borrower will have to pay conversion charges of about 1.75 per cent on the principal outstanding amount. More importantly, the current uptrend in interest rates will not last forever. Rates will begin to come down at one point of time,” said a bank official.

Bankers expect Reddy to raise the reverse repo and repo rates to tame inflation, which is hovering around the 5 per cent mark. Inflation is likely to head northwards in the coming months, as crude prices have crossed $75 per barrel.

Apart from this, other central banks are raising interest rates. Though US Fed chief Ben Bernanke recently hinted at a pause in his policy to continuously raise rates, there are indications that Bank of Japan and the European Central Bank may tighten their policies.

“We expect a 25-basis-point hike in the reverse repo and repo rates. Despite the tightening of the policy, we expect the RBI to explicitly mention that credit needs of the productive sector of the economy will be met,” said S.P. Prabhu of IDBI Capital.

Though Prabhu’s views are echoed by many, few expect Reddy to raise the cash reserve ratio (CRR), which is at 5 per cent.

The CRR was last raised in 2004 by half-a-percentage point. Those who expect Reddy to increase CRR, say this can be done to drain out the surplus liquidity from the system.

However, most bankers do not expect Reddy to raise CRR as the existing tools of liquidity management is sufficient to take care of the excess money floating in the system. Prabhu has put the current liquidity surplus in the system at Rs 130,000 crore.

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