RBI resists its urge: rates intact, home loans up to 20 lakh may get cheaper

The credit policy for 2007-08 today brought cheer to the markets and those seeking small home loans, with the RBI leaving key lending rates untouched...

The credit policy for 2007-08 today brought cheer to the markets and those seeking small home loans, with the RBI leaving key lending rates untouched and paving the way for lower interest rates on housing loans under Rs 20 lakh.

The central bank reduced the risk weight on home loans of up to Rs 20 lakh from 75 per cent to 50 per cent — a move that will result in a reduction of up to 0.5 percentage points in interest rates. But any actual rate cut will depend on whether a bank chooses to extend the benefit to consumers.

RBI Governor Y V Reddy also kept the cash reserve ratio (CRR), repo rate — the rate at which RBI lends to banks — reverse repo and bank rates all unchanged. The news was cheered by the stock markets, reflected in a massive 208-point gain by the Sensex, which rose above 14,000 points.

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RBI projected a GDP growth rate of 8.5 per cent for 2007-08, nearly a percentage point below the 9.2 per cent achieved in the last fiscal. It has also targeted inflation at around 5 per cent for the same period, up from 5.5 per cent.

The RBI also increased the limit on portfolio investment by listed Indian companies in foreign listed companies from 25 per cent to 35 per cent of their net worth. The limit for overseas investment in a joint venture or a wholly owned subsidiary by Indian companies will now be 300 per cent of their net worth, up from 200 per cent.

The cap for mutual funds investing abroad was also raised from $3 billion to $4 billion. And the amount Indians can remit abroad has been doubled to $100,000.

What RBI did

• Key bank rates left unchanged

• Home loan below Rs 20 lakh may soften by up to 50 basis points

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• Indians can now invest up to $1,00,000 a year in foreign markets

• Proposal to raise investment limit for Indian companies from the existing limit of 200% of their net worth to 300%

• RBI sees economy expanding by 8.5% this fiscal against 9.2% in 2006-07, inflation targeted at a lower 5%