Car, home loans will become dearer

It is likely to dampen the demand for consumer goods

September 18, 2011 02:18 am | Updated 02:19 am IST - NEW DELHI:

Already hit by the latest hike in the price of petrol by Rs.3.14 paise per litre, consumers looking to buying a car or a house are in for another jolt as Friday's interest rate hike by 25 basis points by the Reserve Bank of India (RBI) will not only hike interest rates further but also make borrowing a “difficult.”

The equated monthly instalment (EMI) for housing as well as car loans is likely to go up from next month as the banks are expected to consider the new RBI rate and take a decision on the burden to be passed on to the consumers. Those who are already having loans are likely to face a hike in their EMIs and those who are looking for fresh loans will certainly have to work out their options according to the new interest regime.

This is the12th time since March 2010 that interest rates have been hiked by the RBI by 25 basis points to rein in high inflation. Headline inflation rose to 9.8 per cent in August from 9.2 per cent in July this year.

With the festive season beginning early next month, the interest rate hike is likely to dampen the demand for not only consumer goods but also in the automobile and housing sectors.

The hike in interest rates comes on the heels of a petrol price increase two days back and hike in the price of milk that has gone up by an alarming five times in the last two years. This, despite the fact, that there has been no decline in milk production.

During 2010, milk production was about 140 million tonnes against the demand for 160 million tonnes. Experts say the dairy sector needs to grow at six per cent per annum against the current annual growth of around four per cent to meet its demand. The country would require 180 million tonnes of milk by 2020.

“I believe banks would wait till the month-end before taking a call on interest rates,” Indian Overseas Bank Chairman and Managing Director M. Narendra said.

A 25-basis point hike will lead to an increase of only Rs.170 in EMI on a Rs.10-lakh home loan. However, the cumulative impact of a 350-basis point increase in the last two years has resulted in the EMI going up by several thousand rupees for an average home loan borrower.

EMIs will go up

For instance, home loan EMIs of Rs.20 lakh for 15 years would go up by about Rs.400. Auto loans EMIs will even cost more depending on the plan opted by the consumers.

The hardening of the interest rates combined with petrol price hike could not have come at a worst time for the automobile industry which is already reeling under sagging demand. The realty sector has indicated that the cost of borrowing loans for them will also increase impacting the cost of the property by 15 to 20 per cent on an average.

“Even as the RBI justifies this rate hike to dampen inflationary expectations, it is difficult to fathom that this will be achieved when a cumulative rate hike of 325 basis points since March 2010 could not achieve this objective,'' FICCI secretary general Rajiv Kumar said.

On the other hand, the CII said urgent action is required to step up the growth momentum, especially in the manufacturing sector.

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