With hike in CRR from around 5% and repo rate from around 7% in 2005 to 9% on 29th July 2008, home loan rates went up from 7% to almost 13%. Banks easily quoted these measures as signals from RBI as a reason for the same. So, with cuts of 2.5% in CRR in the last one week, shall we see any relief in home loan rates?
Even if we forget last 1% cut today (evening of 15th Oct), ICICI Bank clearly denied any rate cuts 2 days ago despite 1.5% cut in CRR. Typically, SBI, HDFC and ICICI Bank acts as indicators of interest rates movements (though other banks do take actions based on their judgements but that is not the case most often). So, if one of them issues such a statement it is an indicator of response of banking system. CRR cut is definitely going to ease liquidity in the banking system (adding almost 1 lakh crores! Whoa!!) implicating reduction in FD rates and inter-institution lending/borrowing rates (Call money rates already dropping from 22% to 9%), then why can't we ordinary citizens expect easing in our borrowing rates? A lag is Ok but a vehement denial of a reduction is heart-breaking.
I think rates will surely come down. But the lag will be determined by how long banks can fleece individual borrowers. Next few weeks will reflect trend and extent of drop in borrowing costs. I feel that lower borrowing costs and pressure to win market share in one of the most secure loans market (i.e. the Indian Home Loans market, which is quite unlike US or other developed countries' home loan markets as people borrow to build homes and not to spend by taking loans against their loans) will make home loan companies jostle to cut lending rates. And if existing loans rates are not cut, then these institutions will surely like to provide you with an option to swap your loans at a lower cost. This is what shall drive rates down. This is what we witnessed in early 2000s and I think this time it will not be any different this time around. What say you?
Even if we forget last 1% cut today (evening of 15th Oct), ICICI Bank clearly denied any rate cuts 2 days ago despite 1.5% cut in CRR. Typically, SBI, HDFC and ICICI Bank acts as indicators of interest rates movements (though other banks do take actions based on their judgements but that is not the case most often). So, if one of them issues such a statement it is an indicator of response of banking system. CRR cut is definitely going to ease liquidity in the banking system (adding almost 1 lakh crores! Whoa!!) implicating reduction in FD rates and inter-institution lending/borrowing rates (Call money rates already dropping from 22% to 9%), then why can't we ordinary citizens expect easing in our borrowing rates? A lag is Ok but a vehement denial of a reduction is heart-breaking.
I think rates will surely come down. But the lag will be determined by how long banks can fleece individual borrowers. Next few weeks will reflect trend and extent of drop in borrowing costs. I feel that lower borrowing costs and pressure to win market share in one of the most secure loans market (i.e. the Indian Home Loans market, which is quite unlike US or other developed countries' home loan markets as people borrow to build homes and not to spend by taking loans against their loans) will make home loan companies jostle to cut lending rates. And if existing loans rates are not cut, then these institutions will surely like to provide you with an option to swap your loans at a lower cost. This is what shall drive rates down. This is what we witnessed in early 2000s and I think this time it will not be any different this time around. What say you?
