Home Loan


If you are thinking to take the home loan for your dream home then you can wait for some time because there are strong expectations that home loan interest rates may come down in the near future. The expectations have been fuelled by the recent Interim Budget. The macroeconomic data indicated in the Budget reinforces these expectations. The Interim Budget has targeted fiscal consolidation. A lower fiscal deficit target and a lower-than-expected government borrowing programme for the financial year 2015 were projected in it.

Food prices, which were the cause of high inflation numbers, are coming down. If the food inflation eases, the Reserve Bank of India (RBI) will have more leverage to bring down the key interest rates. A reduction in the key interest rates will translate into lower interest rates on home loans in India as well.

The RBI has indicated that it is keen on making tackling high inflation its major objective, and that it is likely to target consumer prices in the future. However, given the current economic situation, the RBI needs to strike a balance between growth and controlling prices.

For the financial year 2015, the government has set a fiscal deficit target of 4.10 percent of the GDP, which is marginally better than the expected 4.20 percent. A net market borrowing of Rs 4.57 lakh crores is expected to finance 87 percent of the fiscal deficit, while gross market borrowings are likely at Rs 5.97 lakh crores in the financial year 2015, better than market expectations which were in the range of Rs 6.10 to Rs 6.40 lakh crores.

The expectation of a reduction in interest rates also gets support from expectations that the exchange rate will improve. With a fiscal deficit target of 4.10 percent for the financial year 2015 and 4.60 percent for the financial year 2014, the economy can be expected to draw the confidence of foreign and domestic investors, thereby providing positive signals to the rupee as well.

The Wholesale Price Index (WPI) based inflation dropped by over one percent to 5.10 percent in January this year (as compared to 6.20 percent in December 2013). The Consumer Price Index (CPI) based inflation also dropped – to 8.09 percent (as compared to 9.87 percent in December 2013). The downtrend in both the WPI and CPI based inflation rates will also provide comfort to the RBI considering their relation to the key interest rates.

Industrial production, particularly manufacturing, has shown a slowing down in December and November 2013. Investments in manufacturing, a major component of the industry, are not forthcoming because of high interest rates. According to the RBI, inflation led to a slower growth rate and unless inflation is curbed there will be no sharp growth.

So, inflation acts as a barometer while deciding on the timing and quantum of cuts in interest rates. With inflation showing a downward trend, things look optimistic. As such, a prospective home loan borrower can expect a reduction in interest rates in the coming months. The reduction will be gradual as the RBI will watch the inflation numbers closely and then take cautious steps towards reducing the key rates.

In these conditions, prospective home loan borrowers in India should stick to a floating rate loan.