With finance minister P Chidambaram keeping the onus of cooling prices on Reserve Bank of India (RBI) on Saturday, economists are expecting RBI to hike repo rate (the rate at which the central bank provides short-term funds to banks) by 50 basis points, from 8.0 per cent to 8.5 per cent. Reverse repo rate (the rate at which RBI borrows from banks and currently at 6 per cent) is also expected to be hiked.
“RBI may have to be aggressive in pursuing inflation,” said A. Prasanna, economist, ICICI Securities PD. “It is expected to hike repo rate by 50 basis points soon, though in one go or not is difficult to say. Now, fiscal (duty/tax cuts by the Centre) measures are almost exhausted.” Raising cash reserve ratio (CRR or the portion of deposits banks have to keep with the RBI) is considered not enough to the task at hand.
Many banks are waiting for RBI’s signal to raise their deposit and lending rates. This would curtail spending power of an individual in general, leading to lower demand for goods and services, and result in price fall.
Apart from consumer spending, these inflation-control moves are expected to make servicing existing home and consumer loans under flexible rate schemes difficult, as equated monthly installments (EMIs) rise, and force new borrowers to postpone their purchases. Worse, for some borrowers under fixed rate schemes, the rate hikes may trigger resetting of EMIs at higher level.
Financial planners are advising their clients to wait for a few months before buying a house. “Interest rates on home and consumer loans will rise by 1 per cent,” said D. Sundararajan, CEO, Trendy Investments. “The demand for housing is set to come down. So, I am asking my clients to wait for three months and take advantage of expected fall in property prices.”
As borrowing becomes expensive, people postpone or stop buying non-essential commodities. “High interest rates will have a direct impact on sectors like real estate, automobiles and consumer durables as most people borrow for buying their wares,” said Siddharth Sanyal, chief economist, Edelweiss Capital.