Interest Rate Fall Unlikely For Now

Have home loan rates bottomed out? Or will they fall further? Are such historically low rates sustainable?

Keki Mistry

Managing Director HDFC

The recent interest rate cut on home loans has not been triggered by any rate war. It is simply a reaction and reflection of the fact that funding costs have dropped sharply and is being passed on to the ultimate borrower.

The yields on five-year government paper have dropped sharply and this has been reflected in the reduced cost of funding for most players on the home loan turf. Take the case of the Housing Development Finance Corporation (HDFC), for instance.

Six months back we could raise five-year paper at an annualised rate of 8.8 per cent. Today, we are raising five-year funds at an annualised cost of around 7.75 per cent. On the liability side, HDFC has reduced its deposit rates seven times in a span of 16 months between April 2001 and July 2002.

The aggregate drop in interest rates have varied between 2.25 to 2.5 per cent, depending on the maturity period of the deposits.

The cost of home loan ultimately depends on how an organisation can raise funds from the market and at what rate.

Corporates are borrowing money in the commercial paper (CP) market at around 6.25 per cent for a three month tenor. Even for a large housing finance institution like ours , the borrowing cost of short-term money