There’s some good news for home loan borrowers. Banks have started reducing interest rates on housing loans. In the last few days some major banks reduced their interest rates. Others may follow suit shortly.

After the soft interest rate regime, interest rates had moved up about a couple of years ago. Sustained increase in inflation and the measures to control it had further fuelled the interest rate hikes. The Reserve Bank of India (RBI) had to step in and take proactive measures to control inflation. This led to increases in repo rate, reverse repo rate, and the cash reserve ratio (CRR). The aim was to i’educe liquidity in the market. With tightening of liquidity, the interest rates further increased in the short term.

Interest rates are affected by inflation and liquidity. Liquidity affects interest rates, purely by the demand-supply principle. Generally, high demand for money but low supply increases interest rates and vice versa.

Because of the strong fiscal measures taken by the government, the interest rates were pushed up. The proactive steps by the RBI have started yielding results. Inflation is well under control. The RBI hasn't touched the interest rates in the last credit policy. Inflation has come down to about four percent. Also, the liquidity situation has improved considerably. The money market’s liquidity is more due to a slow down in credit growth while deposit expansion has sustained the momentum.

The confidence that inflation is under control is growing. Accordingly, it is expected that interest rates may fall, providing some much-needed and awaited relief to home loan borrowers. The projected inflation in the medium term is about four percent.

This is the right time to buy a house. The banks’ lending rates are a function of their cost of funds. They have seen a reduction in their costs of funds. Generally, there has been a reduction of about 50 basis points in the cost of funds.

It is expected that a reduction in interest rates would increase the credit off-take under the housing loans schemes. Moreover, the festive season is around the corner. So credit off-take needs to pick up now. Of late, the demand for credit was reduced because of the high interest rates. The recent rate decrease by the US Fed has also increased the downward momentum of interest rates.

There may be a rate cut by the RBI in the light of the moderating inflation rate. However, the RBI needs to be cautious of the money supply in the system and inflationary factors. As such, drastic interest rate reductions may not be possible in the very near future. However, one may expect more good news in the medium to longer term.