Tuesday, February 13, 2007

RBI ends the party, loan rates will go up

DNA India reports
MUMBAI: If you have been partying hard on rising salary levels and big gains from a bull market, here’s a sobering message: slow down, or else…

The Reserve Bank of India (RBI), worried about a runaway price spiral — wholesale inflation is rising at 6.6 per cent annually — has fired yet another warning shot.
In a move aimed at choking consumer lending, the central bank impounded Rs14,000 crore of bank funds through a device called the cash reserve ratio (CRR). The CRR is being raised in two stages by 0.5 per cent to 6 per cent by March 3, which is the highest level since November 2001.

The impending cash crunch will force banks to raise everything from home and car loan rates to corporate lending rates, perhaps by another 0.5-1 per cent. The finance minister’s recent call to public-sector banks to hold the line on home loan rates is thus a dead letter. State Bank of India managing director TS Bhattacharya has gone on record to say that both lending and deposit rates may need to be raised again.

“The moment you impound funds, there will be a shortage of deposits and banks will get desperate to get more deposits in the market. The shortage of funds will affect all segments,” Bhattacharya told Bloomberg.

A spokesman for housing finance company HDFC, Mahesh Shah, concurred: “Interest rates will move up on all consumer loans.

The question now is by how much.”

The stock markets are widely expected to react adversely today, since banking, real estate, and infrastructure stocks could face the heat. “The RBI move has taken everyone by surprise. The markets will open with a downward gap on Wednesday and I see the Sensex closing at least 200 points down from Tuesday’s close,” said SP Jain, managing director, Networth Stock Broking.

The good news for new buyers is that prices may start to descend from stratospheric levels. Manoj Motta, general manager of K Raheja Corp, said: “This move of the central bank could trigger a cycle whereby housing finance companies may slow down their disbursements and hike interest rates. Since property prices are already very high, this may hit the buyer’s purchasing power in a way that will send prices rolling down.”

The central bank has been forced to act because high growth — the economy grew 9 per cent last fiscal and could grow 9.2 per cent this fiscal — has boosted inflation. It will get government support for the move since elections are due in Uttar Pradesh this summer, and are already underway in Punjab and Uttaranchal. No politician can hope to win elections with prices of essential commodities soaring.

How the CRR hike affects you

* Home loan rates will rise by 0.25-0.5%
* Auto, personal loan rates will also rise
* The stock markets are likely to crash
* Equity and income funds will do less well
* New issues won’t yield instant gains
* How companies will be affected
* Interest costs will rise for most firms
* Corporate profits will start falling
* Raising money from markets will become tougher
* Borrowing abroad will become cheaper
* Convertible bonds will be harder to sell
* How government will be affected
* The economy may start slowing down
* Govt will have to borrow at higher rates
* Tax revenues could start tapering off
* Room for manoeuvre in budget narrows
* High interest rates will strengthen the rupee

How tighter money will benefit you

* Bank deposit rates will now fetch you more
* House buyers will find prices moderating
* You can pick up stocks cheaper now
* Short-term stock losses can act as tax shield
* Inflation could start falling after a time lag


* Rework asset allocations from equity to debt
* Pre-pay home loans as soon as possible
* Avoid expanding credit card outstandings
* Stay liquid to buy stocks that fall sharply
* Save more of income as opposed to spending

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