The proposal, which is expected to be approved by the Union Cabinet on Tuesday, is aimed at providing some cheer to households saddled with high inflation and rising EMIs (equated monthly installments).

The move, announced in the budget, is being operationalised now to give a message that the government is trying to address concerns of households ahead of Diwali when low sentiments are affecting spending. The scheme is an improvement of the existing facility where the benefit of interest subsidy is available to loans upto Rs 10 lac, provided the cost of the property is Rs 20 lac.

But celebrations could be short-lived as the Reserve Bank of India is widely expected to increase key policy rates by 25 bpss (100 bpss equal one percentage point) on Tuesday afternoon. Taking cues from RBI, lenders are expected to hike rates further to aggravate homebuyers' woes.

For a loan of Rs 15 lac, with 20-year tenure, a 25 bps increase in interest rates will translate into EMI rising by Rs 375, and the annual impact will be to the tune of Rs 4,500. A 1% interest subvention will translate into a saving of Rs 1,500 a year.

"For the people at the lower rung, there will be some benefit since the impact of a hike by RBI may be partially negated," said a public sector bank chief.

Also, the benefit is expected to be offered only on new loans. In any case, the number of beneficiaries will not be significant in big cities given that there are few properties available with a price tag of less than Rs 25 lac.

Source - Economic times