Interest rates are bottoming out: Time to go for that home loan is now

What is the message arising out of the Monetary Policy announcement of the Reserve Bank of India last Friday, as far as the man-on-the-street is concerned ?

Interest rates for both borrowers and depositors seem to have bottomed out. From current levels of about 6.8% for home loans and 5.5% for one year deposits, the movement will be only upwards. Or so, it looks like.

Why do we say so? Let’s look at pointers from Governor Shaktikanta Das’s statement and the subsequent presser. Here they are :

• Growth is picking up. The movement of goods and people and domestic trading activity are growing at a robust pace. Data for sales and new launches of residential units in major metropolitan centres reflect a renewed confidence in the real estate sector. The total flow of credit through bank loans and other debt is Rs 8.85 lakh crore this year so far (up to January 15, 2021), compared with Rs 7.97 lakh crore, up to the comparable date last year.

• Petroleum product prices have reached historic highs as international crude prices surged in recent months. These, along with the sharp increase in industrial raw material prices (like steel and cement) have resulted in a broad-based increase in prices of services and manufacturing products recently.

• The projection for inflation based on the Consumer Price Index (which has a weightage of about 45% for food prices) has been revised to 5.2 per cent for Q4:2020-21 and 5 per cent in the first half of 2021-22

• The Cash Reserve Ratio (the portion of bank deposits which have to be kept with RBI as a liquidity buffer for the sake of system stability and on which RBI pays no interest) is being raised back to 4 per cent from 3 per cent. This means that the money available for lending or liquidity will go down by that extent. One should remember that there is enough liquidity with banks even now to lend. But the RBI is hinting at a slight reversal of loose money policy.

• The Union Government expects to borrow Rs 12 lakh crores from the market in 2021-22. This has already led to an increase in the 10-year Government securities yields, edging up over 6% from below 6%, just a month ago. This would imply that even the GOI will have to pay a little higher interest for its loans than the rate it paid for similar-tenor loans, a few months ago

• Moreover, the Union Government intends to borrow another nearly Rs 1 lakh crore before March 31. So this will add to the normal financial year-end demand for funds.

• According to the RBI Governor, going forward, the Indian economy is poised to move in only one direction and that is “upwards”. It is axiomatic that some kind of price pressures and demand pull will accompany this growth outlook.

The current repo rate (the rate at which RBI is ready to lend to banks overnight against the collateral of Government securities held by them) is 4%. This is the lowest in our history.

It was at 5.15% about a year ago. All other interest rates in our economy are impacted by this and that is why it becomes a vital signal.

As the repo rate had come down and following the lockdown of April/May 2020, banks had cut their lending rates. That’s how the home loan rates have come down to about 6.8% . Interest rates for other loans like car, consumption, business and industry are also relatively down.

The flip side to this is that savers and depositors have also been getting very low interest rates on their bank deposits. Senior citizens who are dependent on interest income from bank deposits alone are getting lower returns.

The latest announcements from RBI make it clear that the low rates are bottoming out. So if you intend borrowing for a home loan, now is the best time to do it. And depositors need not lose heart. You will start getting a higher interest rate, sooner than later.

(The author is a commentator on finance and contemporary topics.)