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Friday, Dec 13, 2019

How RBI’s monetary stance affects you

Inflation has been quite high in recent weeks and one of the actions triggered by this move is hardening of the monetary stance by the Reserve Bank of India. Arnav Pandya tells more....

india Updated: Jul 01, 2008 23:28 IST
Arnav Pandya
Arnav Pandya
Hindustan Times

Inflation has been quite high in recent weeks and one of the actions triggered by this move is hardening of the monetary stance by the Reserve Bank of India (RBI). This stance is nothing but the process of raising interest rates in the economy as well as requiring banks to keep more funds with the central bank. These steps lead to reduction of liquidity in the system and result in lower inflation in the economy. While this is one end-objective, individuals are bound to feel direct impact of these steps. Here are some of the consequences and how investors can tackle the position.

High cost new loans

The loans taken by a person will cost more with the rates being raised. This might not seem much when the increase is considered. It might turn out to be just a few hundred rupees more each month. But in the long run, implications are severe. This results in a larger outflow for the individual over the time period of the loan.

The best way to tackle such a situation is to either reduce the amount borrowed, so that it remains within the affordable range, or to ensure a position where this can be serviced over the given time period. Reckless borrowing especially for items that are not essential should be avoided.

Existing loan impact

Many people go in for floating rates for their loans, especially in case of housing loans. Such individuals feel the direct impact, as banks adjust floating rates. This will typically result in the number of outstanding equated monthly installments (EMI) rising for the individual. They will have to pay more EMI to pay back the same amount of loan.

An individual can do two things in such a position. On one hand they can continue paying the EMI if they think that after some time the rates will reduce, bring down the number of EMI outstanding. Others who want to take some action can pay off some of the capital outstanding to bring down the remaining EMI

Good customers

There is an impact for people who are considered good customers also. The way in which they normally benefit is by paying a lower rate of interest on their loans, plus getting a higher amount of loan. Things will get tough for these customers too as they have to pay a higher rate of interest and this will be an additional cost for them.

For those who can afford to pay the higher rate there is no problem but others would want to restrict their borrowing till the time that rates soften a bit.