With the Reserve Bank of India tightening the screws to save a sinking rupee, monetary liquidity is taking a beating and banks are already hiking interest rates. Even as the exchange rate dropped to an all-time low of nearly Rs70 (Dh3.8) to a dollar on August 22, India’s two leading home finance companies — HDFC and ICICI — slipped in a rate hike of 25 basis points on their benchmark lending rates.
Given the tight monetary conditions, not only are other banks and institutions expected to follow suit in the next few weeks, but this may well be the beginning of a series of rate hikes in an inflationary economic situation.
“For those who have the savings, this is a good time to knock off a housing loan, or at least a part of it,” advises chartered accountant Anantram Rao, adding that prepayment of the housing loan will accrue double benefit for the loan holder. “On one hand, there will be saving of the increased interest component after rate hikes, and on the other, it’s a good time to unlock fixed deposits, which will end up earning negative returns considering that the rate of inflation will be far higher than the interest rate on bank FDs,” says Rao. Moreover, NRIs holding home loans in India will get a high exchange rate for their dollar savings to settle their rupee loans.
As far as new buying and borrowing is concerned, industry experts opine that the joint impact of policy paralysis and economic uncertainty is driving even the housing sector towards a volatile situation, and this may not be the best time to take an aggressive decision. “The economy is showing signs of decelarated GDP growth and increase in home-loan interest rates will only dampen the sales and the sentiment of the real-estate sector,” says Anuj Puri, Chairman and Country Head, Jones Lang LaSalle India, adding that developers are facing a considerable liquidity crunch due to high cost of borrowing compounded by slow sales.
This uncertainty is expected to continue till the general elections due next year and unless one gets a great deal in a ready-possession project, it would be a good idea to keep the cash intact and live loan-free.