Movement of interest rates is probably the most common issue which most people are deliberating. Direction of rates will determine host of their future decisions, be it to loan, investments or even day-to-day expenses. With the consumer boom in Indian economy, younger population participating in the consumerism coupled with increased entrepreneurial initiatives, credit off take has increased substantially contributing to the much talked about ‘liquidity’ problem.
This ‘liquidity’ concern in turn gave rise to another economic worry called ‘inflation’, which is a worrying sign from the consumer’s perspective. With overall economic growth getting hurt by the inflationary pressure, Reserve Bank of India in its monetary policy announced increase in reverse repo rates and CRR hikes to control liquidity and thereby inflation. However, this stance resulted into increase in interest rates, thereby again hitting common consumers, especially those who had already availed loans.
Sounding music to people’s ear, inflation numbers seem to come under control with variety of factors acting in its favour ranging from base effect to better monsoon. Since the beginning of this year, rupee has appreciated by about 9%. Though the appreciation helped in controlling inflation, but it is hurting the export competitiveness of the economy. In case rupee appreciates further at the rate experienced since early this year, RBI may have to take some drastic steps like market sterilisation or CRR hike. However, rupee is unlikely to demonstrate drastic strengthening from current levels, and hence we may not really see any material intervention by RBI.
Thus, coming back to the first question, from hereon what could be the direction that interest rates may take. I believe that in the short term, i.e., in the next three months, with wholesale price index (WPI) touching favourable limits, loan growth getting contained, improving asset liability mix of banks, we may not see aggressive policy stance by RBI and rates may remain stable at current levels. However, broad-based reductions in lending rates are unlikely in the short term.
In the medium term, contingent upon monsoon conditions, sustenance in controlling inflation and capital inflows, call on interest rates will be taken. Aggressive hike in interest rates does not seem to be a reality.
From global market perspective, though other major economies like UK, Euro area, Australia and New Zealand are hiking interest rates, in US we expect interest rates to be steady in 2007. This in turn will keep the capital inflows to India and comfortable levels, thereby not influencing the liquidity conditions. Thus, the upside of interest rate seems to be capped and downward movement of interest rate seems to be protected. So overall we expect a range bound scenario.
Under the given circumstances, my advice to borrowers would be to borrow only if it is a necessity. Time is not right for borrowing for luxuries. For instance, in case a common person wants to borrow for his or her first house, one should not wait. However, decision to purchase second or third flat from investment perspective can certainly be stalled or the surplus money can be routed to other investment avenues. Similarly, with uncertainty prevailing on the direction of interest rate floating or semi fixed interest arrangement should be preferred.