Summary of the article "Interest
Rates May Drop" by Rajeev Deshpande and Siddhartha published in the Times of India dated 21-07-2007.
"Likely Drop in Interest Rates to Provide Relief to House Loan Account Holders" For
controlling the spiralling inflationary tendencies that caused skyrocketing of
prices of food items and other commodities, the
Government of India initiated several control measures such as lowering of import tariffs, imposing export restrictions and controlling goods movement. The money supply was also controlled by rising interest rates resulting from strong fiscal and demand control measures taken up by the government.
As a result, the pressure on prices eased considerably and
inflation based on wholesale price index came down to a moderate level of about 4.27%. The government is now confident that the inflation can be contained at around 4% in the medium term and expects Reserve Bank of India (RBI) to initiate downward adjustment of the interest rates.
The government, however, plans to tread a cautious path and monitor the international grain and oil prices closely on account of adverse climatic conditions prevailing in Russia and Ukraine. A tight monetary policy is expected to be maintained for some more time to come.
A beneficial fallout of the likely pause in climbing interest rates is the expected relief to
home loan account holders, who had to bear high EMI payments on account of a continuous rise in interest rates from 7% to 12.5% over the past three years.Already, banks such as HDFC and Corporation Bank introduced lower interest rates on house loans for a limited period and extended the period further. ICICI Bank also indicated about lowering the interest rates.While some banks started offering reduced rates for house loans of Rs. 20 lakhs and above, others are awaiting RBI's decision on adjustment of interest rates.
Even though, the immediate priority of controlling the inflation by restricting money supply through increased rates of interest is achieved, the government is very much aware of its negative impact on the long term economic growth and intends to do a balancing act.