Monetary policy review: Interest rates to rise
The impact of these rate increases is going to be felt slowly over the next 4-8 weeks.
The first of the promised six weekly reviews by the RBI was just released on Thursday and as widely expected the Repo rates (the rates at which banks borrow from RBI against the security of government securities) were raised to 6 per cent (from 5.75 per cent earlier) and in a surprise move the Reverse Repo rate (the rate at which banks can park funds with RBI) was raised by 0.50 per cent to 5 per cent.
What was more important were the observations and comments which indicated that the RBI may possibly pause the cycle of rate increases that begin about a year ago if inflation reduces and the other external factors remain positive.
The impact of these rate increases is going to be felt slowly over the next 4-8 weeks as both deposit and loan interest rates rise. We have already seen both deposit rates and lending rates rise. For a change the rise in deposit rates exceeded the rise in lending rates. This is likely to continue in the near future also. We will get a feel of the real situation when the festival season kicks off in the second week of October 2010. Given the popularity of the teaser rate scheme for home loans it is likely that they will continue though it is possible the interest rates may go up. All will depend on how big daddy SBI prices its own home loan scheme.
For new home loan buyers , if you have decided to buy - don't wait. Interest rates are going to go up and you should buy now and get yourself into a teaser rate scheme where you will enjoy relative safety of a fixed interest rate at least for the next 12-36 months.
What should existing borrowers do? If you are a home loan borrower with a good track record and are not on a teaser rate scheme , shift to a teaser rate scheme now. Even if you are not up to spending the time and effort required to do this (actually that is an excuse for laziness - but let that pass) at least write officially to your bank to shift you to their Base Rate scheme. The Base rate scheme is not automatically applied to existing customers and you will continue getting short changed if , due to inertia, you let your loan continue on the BPLR system.
All in all a very interesting festival season awaits us.
(Harsh Roongta is CEO, Apna Paisa, a price & features comparison engine for loans, insurance and investments)