Credit Policy Review – April 20, 2010

The annual monetary policy for FY 2011 has clearly indicated its direction in favour of controlling inflation. The increase of 25 basis points in the CRR, repo rates and reverse repo rates may not affect interest rates immediately as currently there is still liquidity in the system. But the direction is clear. Interest rates will be going up in this financial year.

So what should a lay consumer do? If you are in the market for a home better hurry up on your purchase and tie in the teaser rate loans that are still available from 4 players (Bank of Rajasthan, HDFC, LIC Housing Finance and SBI and some of its subisdiaries) where you get a low fixed interest rate for the first 2-3 years and floating rate thereafter.

Given the universal expectation that interest rates are bound to rise in the near future the safety of fixed rates even if only for a limited period is quite attractive relative to a floating rate product. Same is the case if you are planning to buy a car. Pure fixed rates are still available from almost all major players and you should avail of them.

However the biggest opportnity is for existing home loan borrowers who are in a floating rate loan. Chances are that you are already paying a fairly stiff rate compared to what is available for new loan consumers today. Get rid of your inertia and shift now to a teaser rate structure and do it now. This is a small window of opportunity which may not remain open for too long.