Announcement

Collapse
No announcement yet.

RBI set to hike rates loans will cost more

Collapse
X
Collapse

RBI set to hike rates loans will cost more

Last updated: May 19 2011
6 | Posts
2795 | Views
  • Time
  • Show
Clear All
new posts

  • RBI set to hike rates loans will cost more

    MUMBAI: Loans are expected to get more expensive both for corporates and individuals with Reserve Bank of India hinting that it is willing to sacrifice some growth in order to tame inflation. For markets, banks and economists , it is almost certain that RBI will raise interest rates by a minimum of 25 basis points on Tuesday in order to bring down prices.

    In its report on macroeconomic and monetary developments , which is a prelude to its policy announcement, RBI said that as prices continue to remains stubbornly high, there is a need to continue with its anti-inflationary monetary policy stance. The report also highlighted that median projection for GDP growth in FY12 has come down to 8.2% from 8.5% in the previous quarter. At the same time, the median for forecast for inflation has risen from 6.6% to 7.5%.

    The report also said that despite RBI's measures, inflation was expected to stay high for some time. The central bank warned that in coming months it may be forced to make a trade-off between inflation and growth.

    "Increasing inflation strengthens our expectations that RBI would continue tightening its key policy rates, at least twice this year. However, with the estimates of a normal monsoon and relative moderation of inflation from its peak at 11% y-o-y in April 2010 to 8.9% in March 2011, RBI would hike both its key policy rates by 25 bps on May 3," said Madan Sabnavis, chief economist, Care Ratings . RBI has increased its raising its repo rate by 200 basis points to 6.75% through eight hikes since March 2010.

    "The run-up to the monetary policy has been dominated by the debate of whether RBI should hike policy rates by 50 bps or 25 bps. The central bank is facing flak from some quarters who argue that even after a year of tightening , headline WPI inflation hasn't declined appreciably. However the counter-factual would be that but for RBI actions , inflation would have climbed even higher," said A Prasanna, who heads fixed income research at ICICI Securities Primary Dealership.

    Joydeep Sen, senior vice president at BNP Paribas, points out that although there are expectations in certain quarters that RBI should go for an aggressive 50 bps rate hike, there is a possibility that with eight review meetings in a year, the central bank can hike rates in the next meeting after one and a half month.

    He points to the interest rate derivative markets where the one-year overnight indexed swap (OIS) is at 7.86%, which implies the market is pricing in more than 1% rate hikes over the next one year, taking the repo rate of 6,75% as the current effective rate.

    Foreign shareholders can pledge shares

    In a move to further Iliberalize and simplify processes associated with foreign investment in India, RBI has allowed banks to permit foreign shareholders to pledge their shares. However, this can be done only for the purpose of raising funds for the local investee firm. RBI has also allowed banks to open escrow accounts without prior permission.


    RBI set to hike rates, loans will cost more - The Economic Times
    Please read IREF rules | FAQ's
  • #2

    #2

    Re : RBI set to hike rates loans will cost more

    Developers/Home Buyers will Feel the Pinch of Higher Interest Rates

    Real estate developers and home buyers will feel the pinch of higher interest rates, which could slow down home sales. Higher interest will push up monthly installments for home loans for existing as well as new home buyers. The National Real Estate Development Council (Naredco) expects interest rates on housing finance to increase to 10.5 per cent for loans up to Rs 30 lakh and 11 per cent or more on loans above Rs 30 lakh. The Council feels the problem of food price increase and oil price rises should not be tackled by enforcing restrictions on all sectors. Reduced investments in the real estate industry will only widen the housing deficit and escalate cost.

    Naredco estimates a housing shortage of 26.53 million dwelling units in the country, the bulk for low income and economically weaker sections. Ashutosh Limaye, Local Director – Strategic Consulting, Jones Lang LaSalle India, said construction costs have gone up as most developers have been forced to raise money from the private sector in the absence of bank lending. More than interest rates, what’s hurting home buyers is that many banks are now funding only 75 per cent of the cost of an apartment as against 85 per cent earlier. “The fact that the salaried class now has to supply a higher contribution to the cost of their homes is having a very tangible impact on demand,” said Limaye.

    Pradeep Jain, chairman, Confederation of Real Estate Developers’ Association of India, said: ‘‘The increase in rates will intensify the cash crunch scenario the industry is facing. The current pressure on prices is global in character and reflects supply-side bottlenecks. The solution is not monetary tightening.”



    ------------------------------------------

    RE looks to be headed for trouble . Could this be the beginning of correction, which looks to be just sitting at the door step ?
    Please read IREF rules | FAQ's

    Comment

    • #3

      #3

      Re : RBI set to hike rates loans will cost more

      Originally posted by MANOJa View Post
      Real estate developers and home buyers will feel the pinch of higher interest rates, which could slow down home sales. Higher interest will push up monthly installments for home loans for existing as well as new home buyers. The National Real Estate Development Council (Naredco) expects interest rates on housing finance to increase to 10.5 per cent for loans up to Rs 30 lakh and 11 per cent or more on loans above Rs 30 lakh. The Council feels the problem of food price increase and oil price rises should not be tackled by enforcing restrictions on all sectors. Reduced investments in the real estate industry will only widen the housing deficit and escalate cost.

      Naredco estimates a housing shortage of 26.53 million dwelling units in the country, the bulk for low income and economically weaker sections. Ashutosh Limaye, Local Director – Strategic Consulting, Jones Lang LaSalle India, said construction costs have gone up as most developers have been forced to raise money from the private sector in the absence of bank lending. More than interest rates, what’s hurting home buyers is that many banks are now funding only 75 per cent of the cost of an apartment as against 85 per cent earlier. “The fact that the salaried class now has to supply a higher contribution to the cost of their homes is having a very tangible impact on demand,” said Limaye.

      Pradeep Jain, chairman, Confederation of Real Estate Developers’ Association of India, said: ‘‘The increase in rates will intensify the cash crunch scenario the industry is facing. The current pressure on prices is global in character and reflects supply-side bottlenecks. The solution is not monetary tightening.”



      ------------------------------------------

      RE looks to be headed for trouble . Could this be the beginning of correction, which looks to be just sitting at the door step ?

      No,this will not be begining of RE correction, at best only a stagnation of prices.
      RE prices will correct only when people's hopes will die down and hopes die slowly.

      Comment

      • #4

        #4

        Re : RBI set to hike rates loans will cost more

        RAPID RISE - Home loan borrowers feel the heat from higher interest rates

        Consumers servicing equated monthly instal- ments (EMIs) on floating rate home loans have started fac- ing the heat because of a rapid rise in bank loan rates.

        Wooed by banks with conces- sional loan rates in the last cou- ple of years, many mortgage bor- rowers are feeling the pain. State Bank of India (SBI), the nation's largest lender, raised its mini- mum lending rate or base rate by 125 basis points (bps) since Jan- uary while the Reserve Bank of India has hiked its policy rate by 100 bps. One basis point is one- hundredth of a percentage point.

        Analysts are expecting another 50-75 bps rate hike this calendar year and this will make bank loan more expensive.

        A 1% increase in rate trans- lates into `74 increase in hous- ing loan EMI for every `1 lakh loan for 15 years, according to an SBI official who spoke on condi- tion of anonymity. The average home loan size is about `19 lakh.
        This means, a 2% increase would lead to a `2,812 rise in EMIs.

        However, the actual hit could be even more severe.

        Most home loan consumers took loans at special fixed rates for the first three years starting in 2009. Borrowers had to pay 8% in the first year and 9% for the next two years, and after this, the rate is to be adjusted to market rates, at base rate plus 1% or more for loans under `30 lakh.

        With the latest round of hike, SBI's base rate is 9.25%, and if in- deed RBI raises its policy rate by 75 bps, it can go up to 10% by the year end. This means, the home loan rate can be 11%. A 300 bps hike would lead to a `4,218 rise in EMIs for a `19 lakh loan.

        Like SBI, ICICI Bank Ltd, the largest private bank in India, has also hiked its base rate to 9.25% now from 8.25% at the end of De- cember.

        “Even at the bottom of the del- ta, the increase has been 1.5-2%.
        EMIs have been going up and will go up further,“ said Sonal Verma, India economist at No- mura Financial Advisory and Securities (India) Pvt. Ltd.

        Rising EMIs are not only hurting existing borrowers but also driving away potential consumers from builders.

        New home sales, particularly in metros such as Mumbai, have fallen 25-50% but price correction has not been more than 5-10%. While analysts say rising interest rate scenario is responsible for deferring home purchases, others blame the elevated property prices.

        “Customers' decision to buy homes is largely influenced by the property prices and its af- fordability and to a marginal extent on the rates of interest on home loans,“ said V. Srini- vasa Rangan, executive direc- tor of India's largest mortgage lender Housing Development Finance Corp. Ltd (HDFC).
        “Considering the tax benefits available to borrowers on the interest and principal pay- ments the net interest cost to borrowers is still attractive.“ According to Rangan, rising interest rates do not stop people from buying houses.

        “Looking back in the past de- cade, interest rates were as high as 15-16% when the demand for housing loans was still in healthy numbers at that time,“ he said.

        On Saturday, HDFC raised its loan rate by 50 bps, effec- tive Monday.

        Bankers argue that borrow- ers are prepared for higher in- terest rates and say when the loan becomes floating, it does not hit the consumer hard.

        “Servicing loan for an alert consumer is not a concern at all,“ said R.K. Bakshi, executive director of Bank of Baroda.
        “Concern emerges if the borrow- er is over-leveraged. Before giv- ing the loans, banks had studied the repayment capacity of the borrower. Yes, there will be a bit pain, but that is nothing that cannot be adjusted to.“

        Not only consumers, a rapid rise in cost of funds since Janu- ary will also derail consumption demand from companies.

        Verma from Nomura said that tight banking liquidity in the second half of 2010-11 had al- ready pushed companies away from banks towards more ex- pensive open market borrowing.

        “Now these hikes mean that even bank rates are higher,“ she said.

        The rise in rates in the last four months has been too quick for even the large companies to ad- just to, but it is also a reflection of the urgency with which rates were cut to 4.75% in April 2009 in light of the global financial crisis from a peak of 9% in July 2008.

        Samiran Chakraborty, head India research at Standard Chartered Plc, puts the quan- tum of increase in the cost of funds at 250-300 bps since Octo- ber last year.

        “The obvious way to judge the increase in cost of funds is through mortgage EMIs, but since in our country lenders in- crease the tenure of loans, it be- comes difficult to calculate the actual impact,“ he said.

        Chakraborty also points to the rise on the yield of the three- month commercial paper.

        “From 7.5% in October last year, the three-month rate is up 225 bps to 9.75%, an indication of how expensive it has become for companies to raise money,“ he said. Both Verma and Chakraborty said the increase in cost of funds will force both banks as well as companies to look to cheaper funds abroad.

        Besides the need for funds, the huge interest rate differential be- tween the US and India could also fuel funds' borrowing from abroad. The difference between India's benchmark repo rate and the US Federal Reserve's Target Fund rate is 7%, with the Fed rate at 0.25%.

        Indian firms have borrowed $25.77 billion through external commercial borrowings in 2010-11, up from $21.67 billion in 2009-10, RBI data shows.
        That's still lower than the $30.96 billion companies borrowed through this route in 2007-08.

        Verma also expects banks to borrow $9-10 billion in 2010-11 from around $2 billion in 2009-10.

        “Top-tier companies can still access foreign markets but for smaller companies access to funds will be more difficult so we may see some projects being shelved,“ she said.


        RAPID RISE - Home loan borrowers feel the heat from higher interest rates
        Please read IREF rules | FAQ's

        Comment

        • #5

          #5

          Re : RBI set to hike rates loans will cost more

          I know, many of us r fed up, because of the ever rising & often unjustified RE prices.

          Let's wait & watch, as to what actually happens .

          In relation to GGN RE, the Noida Farmers issue, may have an positive impact on GGN ( if the issue continues for long & uncertainties remain in the market) & most scope of correction here, could vanish .



          Originally posted by vatsalbajpai View Post
          No,this will not be begining of RE correction, at best only a stagnation of prices.
          RE prices will correct only when people's hopes will die down and hopes die slowly.
          Please read IREF rules | FAQ's

          Comment

          • #6

            #6

            Re : RBI set to hike rates loans will cost more

            Take my tip - the scope for correction simply doesn't exist in this growing + inflationing economy.

            With the exception of Lutyen Zone in New Delhi and some parts of Mumbai, Realty prices are much much competetive and still cheaper than most growing and grown economies of the world. I strongly believe they are undervalued.

            The rate per capita income is growing, along with the population, it is just a distant dream now to hope for the realty prices at least in NCR to come down.

            Take the classic example of Japan (At the rate India is growing, just in a decade it will leave Japan behind), the density of the population is just a little more than India (India soon will surpass that too), and the realty prices - they sell the flats areas in tiles (4x4 - 6x6), not in square feets, and the prices - no one just can afford. Banks in Japan give loans for upto 99 years term, means one could hardly become the true owner.

            Bank rates are certainly very high at this time (11+%), but they are just hardly sustaining the realty prices, they aren't coming down.

            The moment the rates go around 7-8%, there will be fire in the prices and again for the costly properties, banks will eventually have to come with locked rates and long term 40 years plus mortgage schemes.

            If one has to buy, just buy and not wait!

            P.S.: What really can bring the realty prices down? Simple formula: Increase the property tax to the 2.5%+ per year of the current market value of the property (reviseable every year). That is the only way to arrest the prices and this formula already works in USA and other major developed nations.
            Last edited May 19 2011, 09:22 AM.

            Comment

            • #7

              #7

              Re : RBI set to hike rates loans will cost more

              Let's hope u r right . I am an investor & any rise/constant rise in prices is good for my investments .

              Let's wait & watch . The price bubble has to burst sometime, whether it is tomorrow or after 6 months or an year .
              Please read IREF rules | FAQ's

              Comment

              Have any questions or thoughts about this?
              Working...
              X