Jan. 27: If you are a borrower with outstanding loans — a home loan, car loan or even a personal loan, it’s probably a good time to practice some belt tightening. The persistently high food prices may result in further action on policy rates by the Reserve Bank — and in further interest rate hikes by banks. Moreover, apart from inflation, rising fiscal deficit also presents a challenge as it could push up loan rates.
“We are factoring in an increase of 0.75 per cent in the repo and reverse repo rates by September this year,” says Mr Siddartha Sanyal, an economist with Barclays. The rate at which RBI lends to banks is the repo rate, and the rate at which banks park money with it is reverse repo. The RBI has raised these rates by almost two per cent since March 2010 and commercial banks have responded by raising rates on loans and deposits, with some lag.
“We continue to expect a further 75-100 basis points increase during this calendar year,” said Mr Raman-athan K. of ING Investment Management, after the credit policy meet. Given the high inflation rate, RBI’s action was ‘baby steps’, he had said.
The other factor that could push up interest rates is the rising fiscal deficit — the difference between the government’s total spending and its total income from all sources. “Unless we get some new one-offs like the income from 3G auction, fiscal deficit is likely to be higher in the coming year,” Mr Sanyal adds. “The net borrowing target for FY12 is Rs 4.2 lakh crore, also very high,” he says.
If the fiscal deficit is high, the government will need to borrow more to meet its expenses — driving up interest rates for everyone.