Business Today

Interest rate, petrol price hike to hurt households

For automobile buyers, the sharp hike in petrol prices would add to the burden of rise in car loan rates. The possible increase in diesel prices will hit transportation cost.

Lalatendu Mishra   Mumbai     Last Updated: May 16, 2011  | 11:57 IST

The double whammy of rising interest rates and the sharp hike in petrol prices by Rs 5 a litre will hit households, individual borrowers and companies hard.

Making it difficult for home buyers and those paying equated monthly installments (EMI) on floating interest rates, HDFC Ltd , the country's largest housing mortgager, increased lending rates by 50 basis point (100 basis point is equal to one per cent) to 10.25 per cent for home loans below Rs 30 lakh from Monday. Home loans of over Rs 75 lakh will come at 11 per cent interest.

Deposit rates are also likely to go up further.

HDFC follows State Bank of India and ICICI Bank, which recently increased lending rates by as much as 75 basis points and 50 basis point, respectively, following a 50 basis points repo rate (the rate at which RBI lends to commercial banks) hike by the Reserve Bank of India (RBI).

This would translate into a higher outgo towards the EMI or increase the loan tenure. In a one-year period the rise in home loan rates by around two per cent translates to an increase of 15 per cent in EMI, according to analysts.

The rate hike would be applicable for all types of loans.

For automobile buyers, the sharp hike in petrol prices would add to the burden of rise in car loan rates. The possible increase in diesel prices by Rs 4 a litre shortly would also result in rise in transportation cost.

However, the real estate sector is going to bear the maximum brunt as the interest rate hike would cause a drop in demand since over 90 per cent of the houses are sold through loans.

In such a scenario, a sharp price correction is expected to lure buyers, feel analysts.

"Rising interest rates will hit the demand for real estate as most buyers are EMI sensitive. They are more concerned about the EMI rather than the ticket size (cost) of the house," said Arun Nanda, chairman, Mahindra Lifespace, recently.

"The latest rate hike obviously means that the cost of construction has gone up for developers. Banks have already taken a cautious approach to real estate lending and most developers are now raising funds from the private sector at a higher cost," said Ashutosh Limaye, local director (strategic consulting), Jones Lang LaSalle India.

Under the current circumstances developers are unlikely to increase the cost of their units for fear of losing customers, he said adding the rate hike would affect the low-to-mid-income segments the most.

Meanwhile, the high inflation of 8.2 per cent has started impacting companies, especially the bigger ones. A recent poll conducted by Regus among 600 top business decision makers across India has confirmed this trend.

According to a recent poll conducted by Regus among 600 top business decision makers across India, nearly seven out of 10 (69 per cent) companies reported rapid rise in labour costs and 64 per cent of businesses surveyed said they were facing a steep rise in logistics expenses. A sharp rise in raw material costs was reported by 54 per cent of the respondents.

"Our research confirms that the great majority of companies in India are now experiencing real impact on their business." said Madhusudan Thakur, regional vice president (South Asia), Regus.

The survey also revealed a divergence between the number of smaller and larger companies being affected, with more number of larger companies experiencing lower demand for their products and services. "We anticipate that increasing numbers of smaller and medium enterprises will also be effected," Thakur added.

Courtesy: Mail Today

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