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AWAIT INTEREST RATE HIKE AGAIN!!

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AWAIT INTEREST RATE HIKE AGAIN!!

Last updated: October 1 2011
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  • AWAIT INTEREST RATE HIKE AGAIN!!

    Subbarao hints at further rate hike

    Times of India, Sep 28, 2011, 12.59AM IST
    MUMBAI: In an indication that it has not yet finished with interest rate hikes, the Reserve Bank of India has said that it will continue to remain aggressive in its monetary policy in so far as the government continues to push for growth in its fiscal policy.

    "The Reserve Bank has been battling inflation for the last 20 months. Monetary tightening, as is well known, works by restraining demand. Inasmuch as the fiscal stance is supportive of demand, the monetary stance has had to be more aggressive than otherwise," said RBI governor D Subbarao. The governor was speaking at the Stern School of Business, New York, on Monday. He added that for RBI to support growth (through lower interest rates) it will be necessary for fiscal consolidation to take root more firmly. Bond prices fell upon the governor's comments as many perceived it as a signal that the central bank would continue to hike rates.

    On September 17, RBI had announced its 12th rate hike in 18 months, a period in which it raised rates by 350 basis points. It is now expected to increase rates again in its monetary policy review on October 25. The governor pointed out that while it was the intent of the government to curb fiscal deficit by enacting the Fiscal Responsibility and Budget Management Act, meeting even the post-crisis revised roadmap would be a "challenge" for the centre. "The largest component of discretionary expenditure is on subsidies-on food, fertilizer and petroleum products. In reducing these subsidies, there is inevitably a tension between democratic compulsions and economic virtue," he added.

    In his speech, Subbarao hit back at critics that RBI was hurting growth by raising rates. While admitting that there was a trade-off between growth and low-level inflation, he said that above a certain threshold level of inflation, this relationship reverses. "The trade-off disappears, and high inflation actually starts taking a toll on growth. Estimates by the Reserve Bank using different methodologies put the threshold level of inflation in the range of 4-6%," he said. "With WPI inflation ruling above 9%, we are way past the threshold. At this high level, inflation is unambiguously inimical to growth; it saps investor confidence and erodes medium term growth prospects. The Reserve Bank's monetary tightening is accordingly geared towards safeguarding medium term growth even if it means some sacrifice in near term growth," he said.

    The governor also rebutted the argument that inflation was largely a supply-side issue. He pointed out that crude oil prices recorded an annual average increase of around 17% during the 2000s as against only a modest increase of 2% during the 1990s and a decline of 3% during the 1980s. "This obviously is the outcome of structural changes in supply and demand for oil. Monetary policy has to recognize these underlying trends and respond to them," he said

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  • #2

    #2

    Re : AWAIT INTEREST RATE HIKE AGAIN!!

    RE prices should see some correction after Diwali as sales are definitely down. Whatever sale is happening right now is because of the festive season in my view.

    Comment

    • #3

      #3

      Re : AWAIT INTEREST RATE HIKE AGAIN!!

      Please buy immediately. Prices are slated to rise by 10 to 15% as
      Mr. Ravikanth wishes so.

      Comment

      • #4

        #4

        Re : AWAIT INTEREST RATE HIKE AGAIN!!

        I agree with Mr Ravikanth in this aspect. I know builders are bleeding due to high input cost and high cost of funds. Its just a matter of time that they may pass on the hikes to end users. Prices could go up by 10 to 15% due to this plus don't ignore the Revised guidance value which I guess, is already into effect and it could bumpup ur price further by additional 10 to 15% in some areas. Remember bangalore prices are still 50% undervalued as compared to mumbai,delhi,pune,chennai and hyderabad.

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        • #5

          #5

          Re : AWAIT INTEREST RATE HIKE AGAIN!!

          Mumbai and Delhi RE is a different game all together. Too much of black money is involved in these 2 cities which ensures that RE prices are always high. But, rising interest rate and possible recession west may lead to a fall in price or stagnation on Bangalore RE prices. Demand among service class people is severely dented because of high interest rates.

          Comment

          • #6

            #6

            Re : AWAIT INTEREST RATE HIKE AGAIN!!

            Originally posted by suavedude View Post
            Mumbai and Delhi RE is a different game all together. Too much of black money is involved in these 2 cities which ensures that RE prices are always high. But, rising interest rate and possible recession west may lead to a fall in price or stagnation on Bangalore RE prices. Demand among service class people is severely dented because of high interest rates.
            One thing I am unable to understand is that , How come rising interest rate will lead to fall in prices? Rising interest rate means higher cost of borrowing for both buyer as well as builder. Why would builder reduce the price when he ends up paying higher for getting funds to develop the property??? I would suggest serious buyers not to fall in these traps of property markets crashing etc.. Rather just focus on ur need. If you like any property and it meets your needs and you feel the value delivered justifies the price.. go for it. Don't wait for any good time for market to crash.

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            • #7

              #7

              Re : AWAIT INTEREST RATE HIKE AGAIN!!

              Rising interest rate makes it difficult for people to buy a home on loan leading to a slump in demand. There is a huge slump in demand compared to last year all across India.

              This leads to fall in resale price of ready to move properties. As for developers, definitely their margin is under pressure. They are shelling out more money on interest and can not pass all burden to consumers as demand for property has already slumped.

              To counter less demand , developers have 2 options - less supply that is less new launches or lessen the ticket size for example smaller 2 and 3 bhk's.

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