Reddy Strikes the right notes

May 1, 2007:After several successive policy announcements that signalled higher rates, Reddy has held the rate line this time, which should soothe nervous borrowers.

Interest Rates
Reddy has left key rates unchanged, which is also likely to be the response of most banks to most interest rates — both, deposit and lending. However, bankers say it would be presumptuous to see this as a sign that the 18-month long trend of rising interest rates is reversing.

Home Loans
One rate that could fall is that of small-ticket home loans. With the objective of keeping houses affordable for small borrowers and increasing loan demand in this segment, the RBI reduced the risk weight on home loans of less than Rs 20 lakh from 75 per cent to 50 per cent.

For every kind of loan it gives out, a bank needs to back it with some capital. How much depends on the credit-worthiness of the loan. The riskier a loan, the more capital it has to put aside. A reduction in risk weight for home loans below Rs 20 lakh means banks will have to provide less capital than before for such loans, which gives them an incentive to give out more such loans.

NRI Deposits
Another rate that could fall is that for NRI (non-resident Indian) deposits. The RBI sets limits on the interest rates banks can give on various kinds of NRI deposits. With the probable intention of stemming inflow of dollars into India, the RBI has reduced the ceiling on FCNR (B) and NRE deposits — deposits made by NRIs in a foreign currency and rupees, respectively — by 0.5 percentage point.

Source: expressmoney