Moreover economists expect interest rates to soften in the near future, which may lead to lower borrowing costs for homebuyers.
Rates likely to decline
At the begining of this year , there was a lot of expectation that the RBI would bring down interest rates.But after the 50 basis points cut in April, the RBI has not cut the repo rate, though it has reduced the statutory liquidity ratio(july 31) and the cash reserve ratio(September 17) to make more liquidity available.
The RBI has a delicate balancing act to perform. It must try to boost growth but at the same time it must keep inflation under control.Currently, with the GDP growth rate at below six percent(5.5 percent in the first quarter of the financial year 2013, the second quarter of sub-6 percent growth), the case for cutting rates is getting stronger.
However,the threat of high inflation continues to pre dominate. In june,the whole sale price index(WPI) came in at 7.25 percent and in july it fell further to 6.9 percent.Just when inflationary presures appeared to be abating, the WPI soared back to 7.55 percent in August. The core inflation(non food), a key variable which the RBI tracks, too rose to 5.6 percent in August(the fifth consecutive month-on-month increase).
A number of factors are keeping the inflation high.The first is food inflation.With the monsoon improving in September, India will escape a full-down drought.However, some crops like pulses, coarse wheat and oilseeds are likely to be affected.Prices of protein items will continue to be high due to structural imbalances(demand has gone up while supply has failed to gear up adequately). High minimum support prices(MSP) also put a cap below which food prices can't decline. Some relief may, however, come about due to the revival of the monsoon.
Another key factor is international commodity prices.With global growth slowing down,commodity prices had softened.But, since July, three has been an uptick in their prices.Brent crude is once again trading at around the USD 110 per barrel mark.And, now with central banks around the world(US fed, ECB and Bank of Japan)having undertaken liquidity-injection programmes,commodity prices are unlikely to soften.
High commodity prices internationally leads to imported inflation in india. The recent increase in diesel price will also have a direct impact on inflation in the short term.In addition, there will also be a second-round impact-by raising transportation costs,higher diesel price will lead to higher costs of food and manufactured goods.
The recent revision in power tariffs by state electricity boards will also fuel inflation . HDFC Bank's chief economist Abheek Barua said in a recent report that he expects WPI inflation to average 7.5 percent for the rest of the financial year 2013.However, the recent increase in diesel price will lead to some improvement in the fiscal deficit.This may create room for rate cuts in future(the RBI has made crtailment of the fiscal deficit by the government almost a pre-condition for rate cuts)A further decline in the GDP growth momentum would also raise the probability of a rate cut.
Economist Deepali Bhargava of Execution Noble expects the RBI to cut rates by another 75 basis points in the financial year2013.That's the bottom line then-there may be further rate cuts in the next three to six months unless global energy and commodity prices play spoilsport.
Festive Season Uptrend
Though the RBI has not cut the repo rate after April,banks have begun to cut the interest rates charged on their home loans for a number of reasons. One,it appears that interest rates have peaked and will head down-wards in future. Banks are acting in anticipation of future rate cuts.
Two they are under duress from the government.After assuming charge, finance minister P chidambram urged public sector banks to bring down rates on retail loans to spur credit demand.If retail credit demand goes up, it will spur private investments by corporates,thus creating a virtuous cycle with in the economy.Public sector banks have taken the lead in cutting rates.
Three,the festival season is here.This is the time of the year when the highest proportion of house-buying happens.Banks want to offer competetive rates in order to steal a march over rivals.
Four,with loans to corporates and the infrastructure sector having money in their hads which they need to deploy.
Fixed or floating?
With interest rates headed downward in the near to medium terms,for borrowers,opting for a floating rate loan appears to be the most logical thing to do. But remember that interest rates are cyclical and it is impossible to predict their level and direction over a 15-20 year period.During the last boom,home loan rates had gone as low as around 6.50 percent and today's rates of 10-11 percent were inconceivable then.
Pune-based financial planner veer sardesai makes a case for fixed rate loans.
“Fixed rate loans are preferable for financial planning purposes.you can plan the future knowing exactly how long and what EMI you need to pay .Incase of floating rate loans, as interest rates fluctuate,the tenure or the EMI changes.This comes in the way of planning your future investments and taking care of your other responsibilities such as children's education or saving for your retirement”.
Thus,if you wish to benefit from a likely downward movement in interest rates,go for a floating rate loan.But if you want complete certainly in financial planning,go for a fixed rate loan even though its cost is higher.
Borrowers should consider switching only if there is a considerable gap between their current loan rate and rates offered by other players.with rates having been cut by 25 basis points only,the difference may not be considerable yet.Moreover,take into account the cost of switching.
Though the prepayment penalty has been removed(check whether it is applicable to your loan),you will still have to pay the processing fee on the new loan.
And finally,it may make sense to switch only if you are early into your repayment tenure.If you have very few years remaining,then the benefits may not be worth the trouble.
At this stage Anugraha builders&