Home loan rates to go up?

Tuesday, July 29, 2008 at 9:07 am

The Reserve Bank of India (RBI) is slated to meet for its review of Monetary and Credit policy today (July 29). The central bank is widely expected to hike its key lending rates in a bid to combat spiralling inflation.

RBI is likely to take a tougher stance on monetary policy when it is reviewed today, as inflation continues to hover around 12 per cent, despite a request by industry that no steps should be taken that could lead to higher lending rates.

Any move that the RBI makes to raise its rates, will result in commercial banks following suit. This indicates that home loans, car loans and other borrowings will become more expensive.

Even as bankers have been pleading for stable interest rates, economists expect that RBI would take more steps to contain money supply as inflation is way above the target of 5.5 per cent for the year 2008.

US-based investment bank Goldman Sachs said, “We expect RBI to raise the repo rate (short-term lending rate) and cash reserve ratio (mandatory deposits banks have to maintain with the central bank) by 25 basis points each.”

RBI has this year already raised rates twice and upped the Cash Reserve Ratio, or the amount of cash banks must hold in reserve, three times. To tame inflation, RBI increased CRR by 125 basis points and the repo rate by 75 basis points since the beginning of the year.

In the last month alone, the central bank hiked repo rate by 0.5 per cent, while CRR was raised by 0.75 per cent this month. However, according to IDBI Bank Chairman and Managing Director, Yogesh Agarawal it is unlikely that the apex bank would hike rates as it would be detrimental to the industry, already affected by high interest rates.

“I do not expect further tightening. The apex bank is likely to wait for some time till the policy actions they have already taken show results. A further hike in key rates is unlikely in my opinion,” Agarwal said.

Crisil Principal Economist D K Joshi said to anchor inflation, the central bank is likely to increase repo rate by a further 25 basis points and CRR by another 50 basis points.

Inflation for the week ended July 12 stood at 11.89 per cent as compared to 11.91 in the previous week.

Credit Policy expectations

Arguments in favour of rate hike say that the repo rate is likely to be hiked by 25bps. The rate hike, if enforced, will look to counter inflation which is at a 13 year high.

However, counter arguments say that there is no need for a hike considering that international crude prices have been on the slide. Crude has fallen below $123 per barrel. Food production in India would be on the higher side. Rate hike will have an adverse effect on capital accumulation in the economy. Rate hike will also have an adverse impact mostly on expansion plans of small and medium borrowers.

( This post is from an independent writer. The opinions and views expressed herein are those of the author and are not endorsed by APakistanNews.Com.)

Home loan rates to go up?

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