Home loan EMIs will ease with drop in rate

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The surplus funds that is coming into the banking system will lead to a drop in the benchmark lending rates. This will, in turn, translate to lower EMIs for borrowers

A direct and very visible impact of the recent demonetisation move will be on home loan EMIs. The EMIs are bound to come down in the coming months, or may be even in the coming weeks. There are various factors that support this contention.

The demonetisation move will lead to a softening in the interest rates by banks, thereby lowering the home loan EMIs. Banks are now witnessing a flood of deposits, and are expected to continue to do so till the deadline for depositing old currency notes ends in December. Huge deposits are flowing into the banking system.There are no immediate visible investment options available with banks to invest these deposits in. After the deposit of a large amount of cash in banks, money circulation
will improve in the economy. This will improve the liquidity position of banks and help in either lowering their costly borrowings or repaying their high interest rate loans.The banks have already started to reduce the rates paid by them on fixed deposits. The next step will be a reduction in the lending rates as well, including the interest rates on home loans.

In the recent Income Declaration Scheme 2016, the government had received Rs 29,000 crores in tax through the disclosure of Rs 65,000 crores. Now, as a result of the demonetisation, a huge amount of money is coming into savings and current accounts. Banks have already received Rs 5.40 lakh crores in deposits and more is expected to come in. The huge amount of deposits has led to surplus liquidity in the banking system. This liquidity will help push down the interest rates further. Also, the inflation rate has been under control. In October, the retail inflation rate was 4.20 percent while the wholesale inflation rate eased to 3.39 percent. The retail inflation rate moderated for the third consecutive month in October due to a cooling in food prices. Data released by the Central Statistics Office (CSO) showed the inflation rate measured by the Consumer Price Index (CPI) rose an annual 4.20
percent in October, slower than previous the month’s 4.40 percent. The food price index rose an annual 3.30 percent, lower than 3.90 percent in the previous month. Further, the annual rate of inflation, based on the Wholesale Price Index (WPI), stood at 3.39 percent in October compared to 3.60 percent for the previous month and minus 3.70 percent during the corresponding month of the previous year. The positive impact of the robust monsoon is helping cool down the food prices. So, the inflationary forces are dormant as of now.

In its last monetary policy review in October, the Reserve Bank of India (RBI) had cut the repo rate the rate at which it lends to banks by 0.25 percent, bringing it to 6.25 percent.Cumulatively, the RBI has cut the repo rate by 1.75 percent since January 2015. More reductions can now be expected in the coming Credit Policy reviews, the next on being due in the first week of December. The positive figures strengthen the RBI’s stance to lower the repo rate further, which in turn will reduce the cost of borrowing for banks.

The net result of all these factors will be lower home loan interest rates, with a reduction in the marginal cost of funds for banks. With lower cost of funds, banks will bring down their new lending benchmark (as they are on the marginal cost of funds based lending rate system). A reduction in the interest rate translates to lower EMIs for borrowers. Alternatively, a borrower may go in for a reduction in the tenure by keeping the EMIs the same and close the loan earlier.

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