India’s state-run banks will offer loans at lower rates to home seekers borrowing as much as 2 million rupees ($41,600) to boost demand, O.P. Bhatt, chairman of State Bank of India, said today.

State-run banks will cap the interest rate for home loans of as much as 500,000 rupees at 8.5 percent, Bhatt said in televised comments made in Mumbai today. The rate will be limited to 9.25 percent for borrowers seeking loans of 500,000 rupees to 2 million rupees, Bhatt said.

India’s government is aiming to revive housing demand as a weakening economy and higher borrowing costs curb sales. Prime Minister Manmohan Singh on Dec. 7 announced 200 billion rupees of new expenditure as part of a total 3 trillion rupee spending plan until the March 31 fiscal year end, as the central bank cut rates to boost an economy forecast to grow the slowest in six years.

“It’s a good beginning as it removes the negative bias towards housing and construction,” Rajeev Talwar, group executive director at DLF Ltd., India’s biggest developer, said from New Delhi.

The interest rate will be set for five years, and people borrowing up to 500,000 rupees will be required to pay 10 percent of the value of the home loan as a down payment, Bhatt said, following meetings held by the chiefs of the nation’s state-run banks. State Bank of India, controlled by the government, is the country’s largest lender.

Home prices in cities such as Mumbai and the National Capital Region around New Delhi have doubled in the past three years, reducing affordability.

Demand dropped following an increase in interest rates to a seven-year high as the central bank targeted accelerating inflation. Since October, the central bank has cut the rates three times to 6.5 percent from 9 percent after a global credit crunch sapped the system of cash.

“This would help the real-estate sector as demand picks up,” Chandrajit Banerjee, the director general of the Confederation of Indian Industry, a business lobby group, said in an e-mailed statement. “This is really needed since the sector has been reeling under the impact of the economic slowdown.”

Shares of Indian developers including those of Unitech Ltd., Puravankara Projects Ltd., Housing Development & Infrastructure Ltd. and Parsvnath Developers Ltd. gained after Bhatt’s comments.

Unitech jumped 10.3 percent, the most since Dec. 4, to 37.90 rupees at the close of Mumbai trading. Puravankara advanced 13 percent, the most since March 26, to 46.6 rupees. Housing Development & Infrastructure Ltd. gained 17 percent, the most since Dec. 4, to 127.10 rupees.

The 14-stock Realty Index of the Bombay Stock Exchange has tumbled 82 percent this year, steeper than the 52 percent decline in the benchmark Sensitive Index.

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