With the government and the Reserve Bank of India [Get Quote] taking steps to ease the liquidity crunch, home borrowers and small enterprises may get 25-50 basis points relief from high interest rates in the short term.

If not immediately, it is likely that the lending rates for small and medium enterprises and priority sector loans like those for housing are likely to be lowered by 25-50 basis points after the Reserve Bank of India reviews the monetary policy on October 24.

Taking a cue from the central bank's decision to cut the Cash Reserve Ratio by 50 basis points, which will infuse Rs 20,000 crore (Rs 200 billion) liquidity into the system, bankers expect a further CRR cut by RBI in a phased manner keeping in mind inflationary concerns. "There could be some leverage, which may be given to home borrowers and SMEs," a senior public sector banker said.

Echoing the sentiment, a government official said: "The October 24 monetary policy review may give some signal on interest rates. If there is another 50-bps CRR cut, then there could be a 25-50 basis points cut in interest rates for productive sectors."

Home borrowers and small and medium enterprises have been worst hit by the recent spike in prime lending rates by most banks, which is now over 14 per cent. As a result, lending to the home borrowers and SMEs have been impacted in the last six months.

Due to sharp rise in interest rates, the home loan rates have gone up to 12 per cent for Rs 20 lakh (Rs 2 million) compared to about 9 per cent a year ago. Similarly, the lending rates for SMEs have gone up to 14 per cent as against 10-11 per cent a year ago. Accordingly, deposit rates have also gone up sharply. In fact, banks are paying up to 12 per cent interest per annum for deposits above Rs 5 crore (Rs 50 million).

Besides reviving demand for loans, the moderation in interest rates for home borrowers and SMEs will give a political benefit to the UPA government, which faces a general election before May next year, the industry sources said.

The liquidity tightening had pushed overnight call money rates to 16-17 per cent a few days ago due to withdrawal by foreign institutional investors to meet obligations back home, decline in inflows of foreign money and sharp fall in the stock market due to global financial turmoil.

The government, RBI and market regulator Sebi have taken a number of measures to improve liquidity in the market.