Interest rates likely to fall below 2006 levels
By Vaibhav Aggarwal
Feb 10, 2009
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After discussion on the rate cut amongst the Finance Ministry, the Reserve Bank of India (RBI) and the Indian Banks Association (IBA), retail loans are expected to come down further to a 3 year low level.

The interest rates on retail credit that comprise of home loans, auto loans and personal loans are likely to slash if the inflation rate in the country continue to fall. It is thereby expected to stimulate demand in the housing and other such sectors that are sensitive to the rate changes. Moreover it will assist the economic demand through the general rise in consumption level.

The interest rates have been declining since the past few months due to a host of measures taken by the RBI. The home loan rates that were some where between of 9.25% and 12% at the end of September 2008 have dropped to a range of 8% to 11%. In 2006 these home loan rates were around 7.75% at floating interest rates. The floating rates are all linked to the benchmark prime lending rates of the banks.

The loan rates over that the past three years have been analyzed the finance ministry and as per them, interest rates have come down by a substantial number and yet another 100 to 150 basis points fall is expected in the coming months. This will thereby make the interest rates fall below the lowest level in the recent past.

An official with the finance ministry said, "The rate of inflation is soon expected to come down to 3%. Key monetary and policy rates of the RBI are also at their lowest in many years. In such a situation, we see no reason why interest rates should not come down by another 1 or 1.5 percentage points."

Presently the prime lending rate (PLR) of most banks range between 11.5% and 12.5%. This is closer to the interest rate levels in the range of 10.25% to11.50% that prevailed as on April 1, 2006. This is the rate to which most retail loans of the banks are linked and therefore a reduction in this benchmark rate prompts banks to slash interest rates of all PLR based loans.

Recently the banks have starting slashing their PLR rate and a corresponding reduction in rate of interest on loans linked to it. These cuts are valid for both existing and new customers of the banks.

While the key policy rates are already below the April 2006 levels. Currently the repo and reverse rates stand at 5.5% and 4.5 respectively as compared to the 6.5% and 5.5% in 2006.


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