Home loan rates have come down quite significantly over the last one year as the Reserve Bank of India (RBI) cut the key policy rates (repo and reverse repo rates) and the cash reserve ratio (CRR). The RBI adopted a soft monetary policy by reducing its policy interest rates. The RBI adopted the soft interest rate regime to promote spending and stimulate economic activities, and prevent the economy from getting into a recession in line with the global economic conditions .

In general, the economic conditions have improved significantly over the last few quarters and the liquidity situation is good in the system. Many felt the home loan interest rates would start going up soon as the RBI exits from its soft monetary policy. However, analysts say the decision to tighten the policy depends on many factors and the RBI will act only after taking those factors into consideration. A premature exit from the soft monetary policy may lead to slowing down the pace of the economic growth. On the other hand, a delayed exit may result in a higher inflation rate in the economy.

Here are some significant factors that will drive the monetary policy stand in the near to medium terms:

Macroeconomic and financial parameters
The RBI has to balance the risks associated with inflation, fiscal consolidation and capital inflows. Its decision to continue or exit from the low interest rate regime depends on several factors associated with these risks. Analysts believe the RBI's policy largely depends on macroeconomic and financial market
conditions .
Factors like strong aggregate demand conditions and a well-functioning domestic banking system will pave the way for a gradual exit from the soft monetary policy .

Inflation rate

The Wholesale Price Index (WPI) based inflation rate is quoting at a low level. But it is rising at an alarming pace and analysts believe it will reach the six percent levels by the end of the current fiscal. A concern at the moment is the inflation rate in primary articles, especially in the food index. The inflation rate in the food index is reported in double digits at the moment.

Credit off-take situation in home loan segment

The credit off-take for banks in the home loan segment had been low during the last few quarters. However, with the economic recovery and improved market conditions , the demand in the housing industry is picking up. Consumer sentiments have improved, and the festival offers and schemes floated by various banks
increased demand. The home loan rates are expected to remain soft and stable in the near term as most of the leading banks have extended their festival offers for some more time to attract more borrowers and increase their credit off-take .

External factors

Due to globalisation and strong interdependence of economies, central banks have to consider the global factors before taking any policy decisions within the country. There is uncertainty on the global economic recovery front. The huge stimulus packages announced by central banks across the world have pushed up the inflation rate in many countries.

However, in the US, the inflation rate is still quite low and the Federal Reserve has recently reiterated that the soft interest rate regime will continue for an extended period of time. Given the overall global situation, the policymakers are taking a cautious stance before changing the monetary policy. Therefore, the interest rates are expected to remain stable and soft in the near term.