Blame it on the onions and oil. Your EMIs on home, car and personal loans look set to rise — and stay that way through 2011.
Why? The inflation rate, which stood at 7.48% in November, is already way above 5.5%, the rate the government considers acceptable. The bad news: the November figure does not factor in the petrol price hike a few days ago and the increase in onion (and tomato) prices over the last month.
Once these, and the expected rise in global crude prices beyond their current $90 (R4,140) levels are taken into account, the inflation rate (for December) will rise further.
“If inflation becomes a cause of concern, the Reserve Bank (RBI) will not hesitate to increase rates,” said SC Kalia, executive director, Union Bank of India.
Increasing rates is a standard tool used by central banks to control inflation. It increases costs for companies and deters buyers from making loan-funded purchases. This tempers demand, brings down prices and returns the economy to an even keel.
RBI is expected to increase the rate at which it lends money to banks by up to one percentage point. This rate, called repo, is currently at 6.25%. If the repo rate goes up, banks may be forced to increase interest rates for borrowers.
This, in turn, will make houses, cars and other assets more expensive, bring down demand and force sellers to reduce prices.
“Inflationary pressures will be more pronounced in 2011 than 2010 (due to high crude, commodity prices through the year),” said Rupa Rege Nitsure, chief economist, Bank of Baroda.