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Sunday, November 30, 2008

Why home loan interest rates will drop

some recent developments in the markets that will bring down the home loan interest rates in the near future

• Most banks have not reduced their prime lending rate (PLR) to the extent the Reserve Bank of India (RBI) has cut the rates. Therefore, analysts expect home loans rates will go down as more clarity comes on the issue.

• The government is exerting pressure on public sector banks to reduce their lending rates by reducing their spread. Once these banks reduce the rates, private banks are also expected to follow suit thanks to the competition.

• Liquidity conditions have not improved much even after cutting the cash reserve ratio (CRR), statutory lending rate (SLR) and repo rate. Foreign institutional investors (FIIs) are still taking large amounts of money out from the domestic markets. Experts believe that another rate cut by the RBI is imminent, and hence, it will result in lower home loan interest rates.

• The inflation rate has come down drastically during the last six weeks. This is another indication for the government and RBI to go for a softer monetary policy.

• The GDP growth rate is slowing down due to lower demand and negative consumer sentiments. Lower rates will stimulate demand and result in better growth. Therefore, the industry and experts are exerting pressure on the government and RBI to cut interest rates.

• Many large manufacturing companies have announced a production cut. This will lead to lesser requirements of money from corporates. This will have indirect effect on consumer loans, including home loans.

• The demand for loans has reduced significantly due to negative sentiments in the light of the global slowdown. Banks are offering incentives such as lower interest rates to fresh borrowers.

• Many large countries are initiating moves to control the damage due to the global slowdown. Relief packages and lower interest rates are being announced.

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