Monday, March 01, 2010

Montek says Goldman Sachs analyst is wrong

“We think the Reserve Bank of India will need to raise effective policy rates by 300 basis points in 2010 to bring policy rates to neutral, in the face of rising domestic demand and inflationary pressures,” Goldman’s Mumbai-based economist Tushar Poddar said in a note on Feb. 26 after the budget was announced.

“300 basis points is quite a huge increase but certainly I don’t expect that kind of increase to take place,” Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, an agency that sets India’s growth and investment targets, said in an interview. He added that a narrowing budget deficit will help restrain any rise in corporate borrowing costs.


Lets take a hypothetical example

Principal 75L
Interest 10%
Tenure 10 years
EMI ~1L x 120 months = 120L
Total interest paid = 45L

With an increase of the interest rates to 12%

EMI = 1.076L

Total payments 1.076L x 120 = 129 L

Total interest paid = 54L

What about builders who finance the projects thru loans ? They are hit as well. Now if they pass on this cost to the end-user by a 20% increase in prices, the sky-high prices now will reach the Gods and only Indra will be able to afford these prices.

What a mess the UPA government has created.

Lets hear the detractors on this.

Here is the Businessweek article


Anonymous said...

Actually, the 9-10 % interest rates are almost like teaser rates...After the rates adjust it typically moves to 11-12%. Especially if you happen to lose a job or some other perceived risk fact..the rate adjusts northward pretty fast.

After bankers raise rates later this year, I suspect the actual rates might be 15%! If that happens..instead of 45 L, the joker will end up paying 70 L or more....

This is a recipe for disaster in old age or heart attack in young age :))

Anonymous said...

One thing is for sure, both Singh and Ahluwalia are following the BUSH presidency. They will never raise interset rates. They will pressure RBI to follow low rates.
They don't want to ruin their future to get re-elected. They know it very well that all this fake growth in the 3-4 years will come crumbing down if rates rise.

They might have to raise CRR to avoid a Greece like situation. So, wait for this Bush presidency to get over.

Anonymous said...

Actually we are really in an unenviable situation, if RBI raises interest rates it will see a wall of money from the foreigners especially hedge funds and ETF's who dont see good returns at home except if you are shorting something...and there is a limit to that. So if India raises interest money will come, and it will have to go somewhere, so its either the Stock Market or the Real Estate sector. RBI will have to raise rates way up and cause a deep recession to crash the property bubble, it looks quite self sustaining. BUt wait...there are pockets of softness in that and we should go in there like vultures and buy. As in be patient, take your time to get your finances right, expect the worst and then landup at the developers table or the sellers table, and ask a discount for immediate purchase. Walk if he doesnt agree...or circle and play with a negotiation. Never show desperation, never be in a hurry. Take your time.
Lot of realty is not getting sold. and it does sell easily, its the working people who move fast and close these deals and fall easy victims of broker-builder price fixing nexus. Take your time....whats the fricking hurry. Life is best enjoyed slow and steady.

shailesh said...

Sand crisis could push up cost of new flats in Mumbai

shailesh said...

Good in populism, bad in economics

After food comes shelter. The finance minister has levied a 5% service tax on builders for dwellings under construction and for which the buyers are paying installments. This tax will be eventually passed on to the buyers. Another 5% service tax is imposed on those who rent/lease out their premises. This tax also will be passed on to the tenants, raising rented houses costly. Cement prices have been jacked up in the budget, and the cost of other building materials like steel has been going up. In Mumbai, a two BHK flat already costs from Rs 75 lakh to Rs 1 crore, depending on the location. Now the prices will go up by another Rs 5-10 lakh for two BHK apartments.

Anonymous said...

shailesh, its the old story about the goose that laid golden eggs! I think (and this message is only for the sensible people in this forum)its best to stay away from RE for some will get really messy for some time, I think...

Once the goose has been slaughtered and people find that there are no eggs..they will make tandoori goose out of the goose. Let's land up with barbeque sauce at that time and enjoy the party!

What say?

Anonymous said...

Also, its not just the service tax! Banks are making the right noises for an imminent interest rate hike!!

So, very soon, the burden on buyers will be unbearable!!

Anonymous said...

Once the sentiment goes away, all forces will point towards downward trend. It will be like people not buying at high prices, economy getting into recession, which may lead to layoffs, then again less consumer spending.

Again, GOI will borrow money for stimulus to please the country. But prices will keep going down for years. If unemployment becomes a problem in India unlike US, the salaries would be slashed by half. Again, consumers will not spend and GOI will borrow more money and sell more stakes in PSUs.

Finally, India may become Greece if the fiscal and monetary is not fixed. And if India becomes Greece, there would be catastrophe in India. Emergency like situation.

Anonymous said...

I wonder what would happen to people with EMI burden which becomes heavier and heavier...and then they lose their jobs.

Also, If India becomes Greece, there is no EU to bail them out!

SabbalSeshu said...

It amazes me to see one after another giving their doomsday predictions that do not have any factual foundation. Mortgage business in India started in 90's and prior to that the transactions were upfront. What is going to happen if the mortgage business totally ceases. Do you guys think that the real estate business will crash. Things are done in a different way in India. Business will carry on as usual but may be at a slower pace. Stop dreaming and be realistic.There is an acute scarcity of accommodation in cities. In a city like mumbai, 85% people live in slums, 10% in semi slums and 3% in decent accommodation comparable to a developed country and 2% in good quality houses. There are lot of moneyed people among the 95% of people who live in semi/full slums and these customers are capable in buying the newly constructed homes without the assistance of banks. so goes your interest rate/mortgage theory.

My advice to you is stop dreaming and start buying

Jai Hind

Anonymous said...

That's right sussu...

Pee on man! more sussu, might get you some clients..

No one here knows economics or demand/supply except for you. I wait for these nuggets of wisdom from you man. You are ABSOLUTELY right! we have 95% people living in slums!! They need to buy flats of 50 lacs to 1 crore!! They will take out a mortgage and move out from slums to those towers!!

Hooo Boy! How come these morons just not get it??!! Its the black money and slum dwellers who will come and mop up all the flats and then where will these IT jokers in the US be??

Who's going to have the last laugh eh?? It's sussu bhai and sandaas bhai!!

shailesh said...

Mr. SS: Why would one want to buy in Slumbai anyway? According to you, 85% of my neighbors would be slum dwellers, who wants a view of that from 20 story tower?

The future of India is not Mumbai. It has been left behind by Banglore, Pune, Hyderabad etc... People of Mumbai are living in dreams, and expecting the glory of old days will come back. It will not. The city is run by crooks and blood is being sucked by builders.

I will tell everyone who want decent life, better health, better sanitation, better infrastructure (roads, power), move the hell out of Mumbai. I grew up there for 25 years, and will never live back in old Mumbai again.

SabbalSeshu said...


I totally agree with you. There are beautiful places in south India where one can lead a comfortable life. Eg. Outskirts of Bangalore, Mysore, Cochin, Hyderabad to name a few. Family bonds, friends etc prevent people from doing so. There are exceptions like sikhs, parsis and christians who are always on the lookout for greener pastures, but majority of us always stay put in a places even if it starts rotting.

SabbalSeshu said...


I totally agree with you. There are beautiful places in south India where one can lead a comfortable life. Eg. Outskirts of Bangalore, Mysore, Cochin, Hyderabad to name a few. Family bonds, friends etc prevent people from doing so. There are exceptions like sikhs, parsis and christians who are always on the lookout for greener pastures, but majority of us always stay put in a places even if it starts rotting.

Anonymous said...

sussu bhai,

then stay and rot! do not drag others into you state of degeneration..

Anonymous said...


"What a mess the UPA government has created."

I don't understand your concern or your position at all, except for the fact that you don't like the UPA govt.

In one of the previous posts you rue over the rising inflation, but in this post you don't want the interest rates to go up. You forget to complement the UPA govt for implementing the Sixth Pay Commission which gave a nice hike and arrears to the public service employees, but berate them for supposedly taking that hike away due to the uniform tax code from 2011 -- the details of how that will happen you chose to ignore. Though you like to compare Indian governance with the US governance, but you don't look into the underlying economic situations in both countries -- for example, India did not go into a deep recession like the US did, and Indian banks didn't crash and burn in 2008/2009 like their US counterparts did. Now, you can say all you want that Indian economy is artificially supported and will crash soon, but the fact is that it hasn't yet. And, by the way, Obama has many detractors and a very low approval rating in the US due to deficit that he's creating and the taxes that he's raising. Additionally, US already has the MAT (Min. Alt. Tax) equivalent, called AMT, recommended in the Uniform Tax Code draft.

Isn't the devil always in the details? I would like to see a response from you in which you mention your ideas to deal with the current consumer inflation issues and how to bridge the deficit by not raising any taxes.

Vik said...

I'm not an qualified economist so I cannot provide solutions. I can only say that the finance minister has allowed inflation to run rampant, and now citizens have to face the consequences of double digit inflation. In the USA inflation was contained, there was talk of deflation and now things are stable. We are not even at the peak of 125 dollar oil, or high commodity prices like 2 years ago, but in India things are worse off more so now then before

Anonymous said...

Builders are crying foul over service tax. It is only a very minor factor and very insignificant.

The major factor responsible for the unaffordability is the RE prices and the RE bubble.
These prices only will bring downfall of RE.

Anonymous said...

Almost every other weekend I receive many SMSes which beg the customers to attend some realty exhibition or realty expo.
Newspapers like TOI are printing paid news and acting like pimps for RE.

Due to recession, economic downturn, layoffs and job insecurity people are scared to purchase Flats because they are afraid of huge EMIs for 20 to 25 years.
Also, lot of RE projects are on hold or suspended.
This indicates that lot of flats and RE is not getting sold.

Indian Real Estate is also going to crash like US and Dubai Real Estate.

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