RBI might hike in their indicative rates

The wholesale price index (WPI) is going up bringing difficulties for the Centre due to this RBI might be forced to make hikes in their indicative rates. This means more trouble for the consumers.

For instance Puneet Lakhotia, 26, an employee with a multinational bank made plans to buy a flat before getting married in the next one year. The only problem is he cannot find a suitable house that fits his budget. In the last three months, when banks started reducing their home loan rates, he thought soon he will be able to purchase a flat.

But, the recent rise in the inflation numbers has made him think again as the Reserve Bank of India (RBI) might hike the indicative rates in the upcoming credit policy. At the moment, he is hoping for decrease in property prices.

On the other hand Chetan Tandel was planning to replace his father’s 1992 model Maruti 800 for a better car. But he has postponed his decision because he fears that the household budget could get hit, if he opts for a car loan.

Certainly these are signs that the Indian consumer is not so strong-willed about the prospects of the economy.

Since January, what many people feared of has actually happened. The Sensex has slipped from the peak of 21,000 to 15,500. Add to that an inflation rate of 7 per cent and fears that interest rates are likely to stay firm or worse, even rise in the next few months is quite scary.

According to Madan Sabnavis, chief economist, NCDEX, “Though the rise in inflation is due to supply side constraints, I expect some hike in the cash reserve ratio (CRR) or reverse repo in the upcoming credit policy.”

There are clear indications that in coming day’s consumers have to face more trouble. For a new home buyer like Lakhotia, have to keep fingers cross and pray for some divine intervention. Otherwise, the finances will have to be stretched severely to purchase that “home”.

In case, it is your first home, most financial experts might tell you that it’s best if you do not delay the decision. “Negative sentiments are there, but there is no reason to delay buying because these sentiments balance themselves out over the years,” says a certified financial planner.

Jitendra Balakrishnan, deputy managing director, IDBI Bank said, “Even if there is a CRR hike of 0.25 to .5 per cent, it will not dampen the spirits of the consumer because these small hikes are built into the home loan tenure. So, the monthly outgo from the buyer’s pocket remains the same.”

There is a word of caution from financial planners for the ones who are seeking to take loan that one should not expose oneself to too much risk, even while taking a home loan. Try and limit your home loan to 40-50 per cent of the monthly take-home salary. In fact, if possible, limit your entire credit to a maximum of 50 per cent of salary.

As many home buyers have found themselves in deep trouble because of the rise in the interest rates in the last few years. Some actually bared the pressure of home loan equated monthly installments (EMIs) rising by 10 to 20 per cent, if the tenures were not tinkered with. And with the interest outlook being firm in the next six months, it is best if you do not increase the pressure on yourself.

“A lot of professionals, in the last two years, have found their financial planning going completely haywire because of the rise in the interest rates. In fact, a couple of my clients had to tap into their investment money to pay the EMIs,” adds another financial planner. For the investor in property, the advice is clear.

One should wait and watch for the next six months. Though with credit off take down by 6 per cent, from 23.8 per cent to 17.8 per cent (between March 15, 2007 and March 15, 2008) in the last financial year, there is sure to be some pressure on property prices. Most feel that in six months, there is a strong probability that there would be some correction on that front. There is a word of advice for car buyers through loans, to delay doing the deed.

“If you are taking a car loan to fund the car, then it is best if you wait for sometime,” says financial planner Gaurav Mashruwala. The best thing you can do at this point in time is not take any kind of loans. So, even a summer holiday funded through a loan is a definite no-no.

In short spending decisions have to be considered carefully, especially, as the stock markets are not giving great returns at this point in time. And rising interest rates and inflation will further consume your salary.