The rising crude oil prices that have been consistently pushing inflation to uncomfortable levels in the last few months has finally made the Monetary Policy Committee think-tank to bite the bullet and increase the repo rate or key lending rate by 25 basis points to 6.25% from 6%. Key lending rate is the rate at which the Reserve Bank lends to other banks on short-term basis; this rate also is important for the entire economy that sets the benchmark at which deposits are accepted and loans are advanced. Interestingly, this is the first rate rise in the last four years.
The immediate effect of this announcement is that the housing loan rates would be increased marginally, by at least 0.10% to 0.25%, by banks and financial institutions. A few of them have already been increasing the rates in the past one week.
The rise in interest rates was expected considering the prevailing situation. If the oil prices do not relent in the coming months or if India doesn’t do anything to control its oil consumption or decrease dependency, high interest rate regime may persist, which would not be good.
Crucial factors
Though the stance of the MPC is fortunately “neutral” instead of being “hawkish”, factors such as spread of monsoon across important places in the country, uptick in the manufacturing sector, increased employment and good production of foodgrains would weigh high on further decisions whether to rise, reduce or maintain status quo.
The housing sector that had just started to recover with good offtake in the affordable segment now would be dampened for a while since the borrowing cost for builders as well as buyers would increase.
Temporary
But a growing economy cannot sustain high interest rates that would hamper long-term growth projections, hence these rate hikes in the short to medium term can be viewed as temporary or event-based blips.
For long-term home loan borrowers the present situation should not be a cause of worry since any increase in the lending rates would only be marginal in percentage and negligible in rupee terms. Floating rate option continues to remain the ideal choice.