You can be sure now that lending rates for your home loans, personal loans and car loans will go up faster than they did after the earlier repo rate increases. Following the half per cent rise in the repo rate announced by the Reserve Bank of India on Tuesday, your EMI on a `10-lakh loan for a 20-year tenure could go up by `340. On a car loan of a three-to-five-year tenure, the EMI could shoot up by approximately `1,000.
Announcing an increase in the repo rate by half per cent to 8 per cent, up from 7.5 per cent, RBI governor D. Subbarao said considering that inflation had remained above what the bank considered the comfort level, and that high inflation was inimical to long-term growth, the RBI had persevered with its anti-inflationary stance. Actual inflation has been higher than expected in the first half of 2011-12, he said, adding that bankers had assured him that “the response this time will be more rapid than in the past”. So you can expect the banks to announce hikes in lending rates soon. In fact, YES Bank has already done so.
The stock market gave its thumbs down to the 50 basis point hike, with both the Sensex and Nifty indices swooning after the RBI announcement. The Sensex closed down 353 points, while the Nifty plunged 106 points. The markets had factored in a quarter per cent rise.
Dr Subbarao said though growth had moderated in respect of some interest-sensitive sectors, “there is no evidence of a sharp or broadbased slowdown as yet”. He cited several indicators like exports, imports, indirect tax collection, corporate sales and earnings and demand for bank credit where “demand is moderating only gradually”. On the other hand, he said “private consumption has been strong... Wages had gone up 20 per cent last year against inflation, which was up 10 per cent”. This, he claimed, showed that people could still afford their consumption pattern.
Interestingly, the RBI governor’s perception is borne out by HDFC managing director Renu Sud Karnad, who says: “We give loans to middle-income borrowers for whom a house is a necessity. So a marginal increase in interest rates will not stop them from taking a loan to buy an apartment. Our average loan size last year was `18.6 lakhs and the loan-to-value ratio was just under 68 per cent. So the property value for these loans will be somewhere around `28 lakhs, which is affordable in today’s context.”
She said bankers feel interest rates will have far lesser impact on the demand for loans, in comparison to factors like unstable employment and very high property values. The cost of a house as a multiple of a borrower’s annual income is currently estimated at 4.8 times. In other words, “it takes about 4.8 years’ income to buy a house. As long as that ratio stays in the 4.2-5.5 range, housing loan demand will be there”, she said.
And so will inflation. The RBI has raised its inflation rate projection for March 2012 to seven per cent, up from six per cent which it had indicated in its May 3 policy statement. This is predicated on the expected rise in commodities, particularly oil, the continuing financial crisis in the United States and Europe which could lead to uncertainty in capital inflows that are needed for financing the country’s current account deficit, and the risks to food inflation outlook.
The large fiscal deficit has also been a source of concern and there is likelihood of the government overshooting its budgeted fiscal deficit target significantly in 2011-12.
The RBI did not mince words when placing the onus for fuelling supply side inflation on the government’s inaction on the fiscal front. Explaining why key rates were hiked by 50 basis points, the RBI governor said a key reason was that the central bank had to reinforce the point that “in the absence of complementary policy responses on both the demand and supply sides, stronger monetary policy actions are required”.
He said the hike in domestic petroleum prices in June will add 70 basis points to WPI inflation as a direct impact, and more in the course of the year. So in the tussle between growth and inflation, the latter has won again in the RBI’s scheme of things.