Home and auto loans are set to get pricier- Business News
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Home, auto loans set to get pricier

RBI is likely to hike both the policy rates by 0.25 per cent in the forthcoming review on Thursday.

  • Mumbai,  March 14, 2011  
  • |  
  • UPDATED   11:37 IST

Floating rate home and auto loan borrowers may have to brace for higher interest rates on their loans , with many economists expecting a 0.25 per cent policy interest rate hike by the Reserve Bank of India (RBI) in its midquarter credit policy review on Thursday. However, some of them hope that the apex bank may pause the rate hikes this time, citing uncertainties on the growth front.

"RBI is likely to hike both the policy rates (repo and reverse repo rates) by 0.25 per cent in the forthcoming review. Inflation still remains a problem with oil prices coming under upward pressure, despite some moderation in food prices," said D.K. Joshi, chief economist of rating agency Crisil.

RBI's dilemma - To step in or not

  • The RBI may hike rates to cap the inflationary expectations if the burden of price rise is passed on to the customers
  • Spiralling credit growth is adding to RBI's woes on inflation front as it could push up demand & stoke more price rise
  • A rate hike would also address this concern as higher rates would distance a large No. of prospective borrowers
  • Credit growth in the last 12 months has been above 24 per cent, against the projected 20 per cent growth for the full fiscal
"The government has to pass it on to the customers sooner or later," Joshi added. The Centre is already facing the prospect of rise in fiscal deficit in the coming fiscal. RBI had made it clear that it may not have to act if the global oil price rise is borne by the Centre. But if it is to be passed on to the customers, then it may have to hike rates to cap the inflationary expectations.

Spiralling credit growth is also adding to RBI's worries on the inflation front. It could push up demand and stoke further rise in prices. A rate hike would also address this concern as higher rates would distance a large number of prospective borrowers. Credit growth in the last 12 months has been above 24 per cent, against the projected 20 per cent growth for the fiscal.

If policy rates are hiked again, it will be the eighth time that the RBI would be doing so since March 2010 to tame inflation that has remained at elevated levels. It had raised the repo (rate at which RBI lends to banks) and the reverse repo (rate at which it accepts overnight deposits from banks) rate by 1.75 per cent and 2.25 per cent to 6.5 per cent and 5.5 per cent, respectively.

Food price inflation softened to a three-month low of 9.52 per cent in late February. The benchmark WPI inflation in January was at 8.23 per cent, well above the RBI's comfort zone of four to five per cent and its end-March 2011 target of seven per cent. WPI inflation for February is expected to moderate further.

However, Prof. N.R. Bhanumurthy of the National Institute of Public Finance and Policy (NIPFP), said, "It is a big dilemma on how to balance low inflation and high growth at this juncture. Corporate investments are not picking up, and that is also getting reflected in the IIP (index of industrial production) figures. As such, RBI might hold for this time and act in the quarterly review in May."

"Aggressive hike in rates are expected to stifle economic growth. So, movements of inflation would be watched carefully," Bhanumurthy added. IIP grew by only 3.7 per cent in January, compared to the same months in 2010. This is subdued, though higher than that in December. "The high base year effect has been a dampener on growth numbers this year and will continue to be so in February and March. Also, high interest rates have started impacting investment decisions," said Madan Sabnavis, chief economist of CARE Ratings.

"We believe that the RBI should maintain a neutral stance on March 17 as inflation is coming down and industrial growth is being affected by high interest rates, though the RBI might increase interest rates by another 25 bps (or 0.25 per cent)," Sabanavis added.

Courtesy: Mail Today