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Your loans may survive a rate scare

india Updated: Apr 27, 2008 22:38 IST
BS Srinivasalu Reddy
BS Srinivasalu Reddy
Hindustan Times
Highlight Story

Your home and personal loans may survive an interest rate rise scare this week as the Reserve Bank of India (RBI) unveils its quarterly credit policy review on Tuesday.

While high inflation has policy-makers worried, expectations are that the central bank may squeeze money supply to send a tough message to the banking system than rely on a rate push that may be passed on to make your equated monthly instalments (EMIs) on loan higher.

That could well be the politically comfortable way out for policy-makers, say experts who track Dr. Yaga Venugopal Reddy, whose conservative governorship on interest rates has been endorsed by a sudden surge in commodity prices. Indications are that Reddy might talk up the rates than push them directly himself.

However, there is a possibility of a 0.25 per cent hike in the Repo rate (the rate at which the RBI lends to banks) to send a clear signal to the banks.

Usually, higher interest rates encourage savings and leads consumers to defer or cut back on purchases until rates soften. This leads to lower demand for goods and services and in turn can squeeze inflation rates.

The US Federal Reserve is also due to meet on Tuesday and Wednesday.

“Though the RBI policy announcement coincides with that of the Fed, domestic factors are expected to dominate the policy,” said Naveen Munot, Executive Director at Morgan Stanley Mutual Fund.

With an overhang of a hike in the prices of food items, cement and steel compounded by a surge in international crude prices, the undercurrent of inflation in the economy is pretty strong.

Year-on-year inflation rose to 7.33 per cent for the latest week ended April 12, from 7.14 per cent for the previous week.

Some senior bankers and economists are of the view that the RBI would maintain status quo on the rates front, but would send a strong signal that it would be ready to hike rates any time, if warranted. That could involve a signal to hike any key rate – repo or reverse repo (the rate which banks are paid on their overnight deposits with the RBI) - before the next policy review in July.

Such the move, as a senior banker of a largest public sector bank said, will also help avoid creating an impression that the RBI was out to spoil the growth party in the economy while keeping a stick ready to tame inflation.

“RBI can bring in the same impact by deferring the rate hike for now, and later hiking the Cash Reserve Ratio (part of the deposits to be kept by the banks with the RBI) to squeeze money available for further lending by banks. Anyway credit demand is weak already,” said A. Prasanna, Economist with ICICI Securities.

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