A loan to purchase or build a house is available at around the 10 percent level. It used to be around seven percent a couple of years ago. Also, the interest rates remained quite volatile over the last few quarters. However, this is a cyclical phenomenon. Over a long loan tenure, it will move upwards and downwards. The average rate and tax incentive together add up to make it good for the borrower.
Here are some factors that influence interest rate movements:
Inflation
Inflation plays a significant role in influencing the monetary policy of the Reserve Bank of India (RBI). It forces the central bank to hike the interest rates. Currently, inflation has gone up over 11 percent (way above the RBI's mandated inflation level of around five percent per annum). The main reasons for this high inflation rate are a sharp rise in prices of basic commodities, and hike in rates of petroleum products (petrol, diesel and cooking gas). The RBI has announced a repo rate hike twice this month itself to control the rising inflation level. This repo rate hike makes funds costlier for banks and as a result interest rates are quoting high and are expected to go even higher in the coming weeks. However, experts believe that the rates will not go up very significantly as high interest rates have an adverse impact on the growth rate of the economy.
Liquidity
The liquidity in the system is another parameter that influences interest rate movements. Liquidity influences the cost of acquisition of funds for banks. If liquidity is low, cost of raising funds will increase, and hence, they will need to raise the interest rates on their lending. There are many factors that influence the liquidity in the system. Fund inflows from foreign investors and a cut in the cash reserve ratio (CRR) increase liquidity in the system and vice versa.
Here are some factors that influence interest rate movements:
Inflation
Inflation plays a significant role in influencing the monetary policy of the Reserve Bank of India (RBI). It forces the central bank to hike the interest rates. Currently, inflation has gone up over 11 percent (way above the RBI's mandated inflation level of around five percent per annum). The main reasons for this high inflation rate are a sharp rise in prices of basic commodities, and hike in rates of petroleum products (petrol, diesel and cooking gas). The RBI has announced a repo rate hike twice this month itself to control the rising inflation level. This repo rate hike makes funds costlier for banks and as a result interest rates are quoting high and are expected to go even higher in the coming weeks. However, experts believe that the rates will not go up very significantly as high interest rates have an adverse impact on the growth rate of the economy.
Liquidity
The liquidity in the system is another parameter that influences interest rate movements. Liquidity influences the cost of acquisition of funds for banks. If liquidity is low, cost of raising funds will increase, and hence, they will need to raise the interest rates on their lending. There are many factors that influence the liquidity in the system. Fund inflows from foreign investors and a cut in the cash reserve ratio (CRR) increase liquidity in the system and vice versa.
