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Time to borrow

If you have been waiting for an opportune time to take that home loan, or a car or education loan, you’d best not defer your decision much longer.

Narayan Krishnamurthy | Print Edition: August 6, 2009

If you have been waiting for an opportune time to take that home loan, or a car or education loan, you’d best not defer your decision much longer. The downward spiral of interest rates that gave so many so much cause for hope may be coming to an end. There are murmurs among bankers that interest rates are firming up and might rise over the next 4-5 months. Says O.P. Bhatt, chairman, SBI, “Interest rates may go up by 25-100 basis points if liquidity is not managed well when the busy season picks up.”

The RBI uses interest rates swings to influence the economy. So, when the economy weakens, it may decide to lower the interest rate because that will make money flow more freely and, hopefully, stimulate economic growth. On the other hand, interest rates are hiked to make loans less attractive and, thereby, rein in inflation. So what could be the reason for the rate cut party winding up this time round? The culprit is the central government’s borrowing programme, which the finance minister had indicated in his budget speech.

The pressure points
Bank loan growth is expected to pick up as the economic activity revives.
Corporate demand is likely to pick up in the third quarter.
States and local bodies may come out with their own borrowing programmes.
With inflation going up again, RBI may tighten monetary policy.

Here’s how things will pan out: to finance the fiscal deficit, the government will borrow around Rs 4,00,000 crore in the current fiscal, which will cause interest rates to firm up. The various state governments and local bodies that are likely to hit the street with their own borrowing programmes will further compound matters. When the government needs to borrow large sums of money, it has to offer higher interest rates to attract investors. While the increased borrowing will suck out liquidity from the market, it also means that interest rates may move northwards.

Furthermore, bank loan growth has slowed to 15% in June this year compared with the 30% it achieved in 2007-8, which will add to the liquidity concerns in the coming months. Though the finance minister has been repeatedly claiming that government borrowings will be managed in a manner that will avoid an interest rate hike, the banking body is not convinced.

The other concern is inflation, which is likely to build up in the coming months on account of rising food prices, the hike in petroleum products and the modest revival in prices of manufactured products. “With deficient rainfall, the risk of rise in the consumer price index is real. When the consumer price index (CPI) moves up, consumers (depositors) may expect banks to protect their returns on deposits. In such circumstances, banks may have to increase deposit rates,” says V.K.R. Agarwal, CFO, Bank of India.

What does this mean for consumers? This is a good time for borrowers to take advantage of the existing low rate to get locked into loans which are fixed in nature. Investing in floating rate funds and debt funds is also a good way to shield your investments from the vagaries of fluctuating interest rates.
- Narayan Krishnamurthy

Holiday Hotspots
67%: Historic sites
54%: National parks
47%: Adventure spots
41%: Spa resorts
The preferred destinations that Indians like to visit while travelling

Travel trends
There was a time when a pilgrimage was the most obvious holiday option for Indians. Today, sole therapy is more in demand than soul therapy, as TripAdvisor’s latest annual travel trends survey reveals. This summer, a majority of Indians chose to travel within the country, along with choosing budget hotels for their stays. Says Sharat Dhall, managing director, TripAdvisor India, “The slowdown has made travellers re-discover Indian destinations in preference over international travel itineraries which were popular over the past couple of years. We are using the slowdown as a great opportunity to reconnect with our roots.”

The economic climate has also shrunk travel budgets. While 60% of the travellers surveyed said they looked for cheaper air tickets on travel Websites, 50% booked their travel in advance to take advantage of low fares. Of the 54% of respondents who chose value-for-money accommodations for their leisure stays, 32% preferred hotels where a room was priced at less than Rs 2,000 a night. However, the rich and upwardly mobile continue to live it up—more than 11% of travellers indicated that they spent upwards of Rs 2 lakh on vacations and plan to continue doing so. In terms of emerging trends, 45% of respondents said they would like to be more environmentally conscious during their travel in the coming year and to choose an eco-friendly hotel for their stay.
- Sushmita Choudhury

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