1. #1

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    Why home loan rates are not falling?

    Two consecutive repo rate cuts by the Central Bank by 25 basis points each but there has been no cut in the major lending rates, including the most awaited home loan rates. Existing as well as prospective borrowers are wondering why banks have not cut the key rates and

    How much time will it take for the banks to do the same?
    What is intriguing for a common man is that when repo rates are increased banks take no time in upping the lending rates?
    So why is it that now that rates have gone down, banks are not cutting repo rates?

    There are two critical things to be understood here. The lending rate of a bank depends upon the cost of borrowing.

    One of the key sources of borrowing is deposits made in banks by the depositors. The second important aspect to note that it that banks operate in a competitive environment and hence for the rates to go down, the overall cost of lending and borrowing should go down. This is a time taking process and hence it does not happen so fast. But even after considering all this, the rate of interest should have fallen by now as it is more than 2 months since Central Bank cut the repo rate for the first time.


    Let us look at another perspective. When Central Bank cuts repo rate, the cost of borrowing for the government is expected to go down as repo rate is the minimum rate of borrowing technically. With Central Bank cutting repo rate, yield on government bonds have gone down.

    This is turn is expected to bring down the rates that corporate offer when they borrow. The same logic applies to bank. As the economy is experiencing slowdown, the banks and corporates are not finding enough reason to lower rate of interest.

    Credit off take is very poor for the banks.

    Rate of interest on other deposits has also not fallen. Post office related investment products such as Saving Certificates are subject to interest rate review once in a year and there has been no change in these rates.

    The prevailing high rates on other forms of deposits make it difficult for banks to cut rate on rate on their deposits. Banks have cut their deposit rates, though marginally, but the impact of these cuts will be felt over a long period of time.
    Key lesson coming from all these scenarios is that unless the cost of borrowing comes down significantly the rate of interest on home loans is not likely to fall. Also looking at the past cases, it is very clear that the impact of repo rate cut takes longer time than impact of repo rate hike.

    The answer to this can be found in the asset liability management that banks have to do. After cutting rate of interests how assets and liabilities of banks will be impacted also needs to be analysed by the banks.
    For home loan borrowers, rate of interest is not likely to fall in near future.

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