Home, auto loans to become dearer; rate hike imminent

Home and auto loans could become costlier again when the Reserve Bank of India (RBI) meets on Thursday to review monetary policy against the backdrop of strong inflationary pressures.

Financial markets are gearing up for a rate hike and Tuesday's inflation data has almost sealed the issue. Government data released on Tuesday showed inflation, as measured by the wholesale price index, stood at 9.06% in May, rising from 8.66% in April. Sharp upward revision in the inflation data for March to 9.68% from the previously estimated 9.04% provided fresh evidence about the nagging inflationary pressure.

The impact of the nine rate increases since March 2010 is slowly emerging with slowing car and home sales, faltering industrial growth and rising borrowing costs. The government and the RBI have flagged taming inflation as top priority.

Inflation has remained above the RBI's comfort level for the past one year. The RBI initially took baby steps to tame inflation but sustained price pressures and volatility in global commodity prices forced it to resort to tackle it head on. In its policy review last month, the RBI raised interest rates by a higher than expected 50 basis points (100 basis points equals one percentage point).

Some economists expect inflation to touch double digit in the months ahead while some say it could hover around 9% levels forcing the RBI to continue with its tight vigil over the price situation.

Finance minister Pranab Mukherjee has said while food and primary inflation has declined, the core inflation (that is other than food, fuel and power inflation) continues to harden. Mukherjee said this posed some concerns which would have to be addressed but he expected inflation to moderate in the months ahead on the back of slowing food prices.

The government has raised petrol prices by Rs 5 per litre but is seen dragging its feet over increasing diesel and cooking gas prices. It has postponed plans to raise diesel and cooking gas prices. Economists say once diesel prices are raised, it would push inflation higher.

"We also note that the expected diesel and cooking gas price hikes were repeatedly deferred last month. A Rs 4 per litre increase in diesel price plus a Rs 30 per cylinder increase in cooking gas prices would lead to around a 100 basis points increase in WPI inflation, including direct and indirect effects. Headline WPI inflation has yet to reflect these price pressures," Standard Chartered Bank said in a research note.


Source:- http://timesofindia.indiatimes.com/business/india-business/Home-auto-loans-to-become-dearer-rate-hike-imminent/articleshow/8857298.cms


Thanks
Ankit Wani
Intern @ DENIP Consultants Pvt. Ltd.