Home loan rates set to soar to double digits

  Planning to take a home loan? Be prepared to shell out double-digit interest rates soon. Lenders say it’s only a matter of time before they are forced to pass on the higher cost of funds to borrowers after the Reserve Bank of India increased key policy rates by 25 basis points on Tuesday.The rate hike, the seventh successive one since January 2010, is aimed at controlling inflation which the RBI described as a “dominant concern”. The rate of inflation as measured by the wholesale price index is now forecast to be at 7% by end-March, much higher than the original estimate of 5%.

At present, new borrowers get loans at close to 9.5%. But borrowers who have availed of home loans around five years back are already paying over 12% following successive increases in prime lending rates.

The increase in policy rates may seem modest. But banks are already in deficit mode and borrowing over Rs 1lakh crore from RBI on a daily basis.

“The liquidity situation is very tight and the cost of funds has gone up for all. Interest rates on home loans would also go up to double digits,” said HDFC chairman Deepak Parekh. He pointed out that top corporates were already borrowing at double digits. Slow down lending: RBI to banks Higher interest rates should be good news for depositors, though rates at which it lends to and borrows from banks — to 6.5% and 5.5% respectively. According to bankers, the 25 basis point hike was a moderate step and by itself not disruptive to growth. Most banks were expecting that the central bank would take further measures to ease liquidity. Many in the financial sector expected the rate hike to be in the order of 50 basis points. “Going forward, higher demand-side pressures emanating from generalized inflation are likely to surface. their enthusiasm for fixed deposits is likely to wane since inflationary expectations could discourage savings. Rising interest rates could also restrain real estate prices in the medium term by tempering demand.

Unveiling its quarterly monetary policy review, the RBI on Tuesday hiked the repo and reverse repo — the Not taming inflation could act as an impediment to the economy’s 8-9% medium term growth rate objective,” said Ajay Srinivasan, chief executive, financial services, Aditya Birla Group.

What ought to worry borrowers is that RBI has told banks in no uncertain terms that they must slow down lending. The biggest concern for the central bank now is that in the third quarter, banks have lent more money than they raised in the form of deposits.