The Reserve Bank of India (RBI) softened its stand on the monetary policy after two years with a 50 basis points cut in the cash reserve ratio (CRR) in the third quarter monetary policy review this week. The RBI has increased the key interest rates several times in the last couple of years. Consequently, the lending interest rates have gone up significantly for borrowers, particularly borrowers of home loans due to the high amount involved in this case.
The impact of the tight monetary policy regime was quite visible. There has been a fair bit of moderation in the GDP growth rate and industrial output. The inflation rate is also showing signs of cooling down since the last couple of months. Analysts say this reduction in the CRR shows the RBI is willing to soften the monetary policy if the inflation rate comes down further in the coming few weeks.
Impact of CRR cut
The CRR is the percentage of a bank’s total deposits that it needs to deposit with the RBI. For example, a CRR of six percent means banks will have to deposit six percentages of their total deposits with the RBI and they will have the other 94 percent for lending.
Thus, if the CRR is high, it means banks will have less money to lend and vice versa. The RBI uses the CRR to control liquidity in the system. The recently-announced 50 basis points cut means banks will have around Rs 32,000 crores more of disposable funds (liquidity) for lending. Therefore, banks will go more aggressive on their lending schemes.
Here are some expectations on the home loan front:
New accounts
Since the CRR cut increases the liquidity in the banking system, it is expected that banks will go more aggressively on their new lending schemes. Therefore, you can expect a push from banks through attractive interest rate schemes for new home loan accounts.
There are expectations that the RBI will soften the monetary policy (cut policy interest rates) further in the coming months. Therefore, it will be better to opt for loan schemes with floating rates rather than get locked in with fixed rate schemes.
Current loans
The recent cut in the CRR is unlikely to lead to a significant drop in banks’ costs and a sharp downward revision in the base rates immediately. However, as the monetary policy stance is beginning to ease, banks are expected to come out with schemes for borrowers to migrate to lower interest rates.
Those who have availed a home loan should keep in touch with their bank representatives for information on such schemes.
Switching loans
Switching a home loan from one bank to another is another aspect that comes into the limelight during times when interest rates follow a downward trajectory. Usually, banks offer attractive interest rates on new loan accounts. It takes a while for rates on existing accounts to drop.
However, switching a home loan from one bank to another comes with certain costs and a borrower should make a thorough analysis of various expenses (pre-closure penalty, new loan processing fee, documentation charge etc) as against the saving from the lower interest rate.

Source
Times Property