Consumer spending to rise despite rate hike

Successive interest rate hikes have had a limited impact on consumer spending, which is expected to accelerate in the second half of 2007-08 from the current levels, according to Credit Suisse, a leading Zurich-based global financial services provider.

Since September 2005, the Reserve Bank of India (RBI) has raised the repo rate by 175 basis points to 7.5 per cent. The repo rate is the rate at which the RBI lends to banks against government securities.

"Outside of autos and motorcycles and property, consumer durables spending is likely to remain robust. Retailers indicate that only 30-35 per cent of purchases are paid by credit cards, hence, the impact of rising interest rates on retail sales may not be that large," said Sailesh K Jha, director, non-Japan Asia Economics at Credit Suisse.

There are also signs of growth in economic activity in developing states, which could provide a buffer to the negative impact of rising interest rates in developed states. The developing states account for 25 per cent of the population and 20 per cent of the country's spending power.

While consumer spending is likely to remain stable in the short-run, it is expected to pick up in the last quarter of 2007-08. The increased consumer demand would contribute to a strong growth in gross domestic product, which the bank forecasts at 9.4 per cent for 2007-08 and 9.6 per cent in the following year.

Interest rates have not reached their peak and are expected to peak only in January 2008. Credit Suisse expects the RBI to hike the cash reserve ratio by another 100 basis points and the repo rate by another 50 basis points over the period.

The bank estimates the average inflation rate to be at 5.5 per cent at the end of March 2008, against the Reserve Bank of India's target of 5 per cent.

'The drop in inflation is temporary. We expect inflation to rise in the second half of 2007-08. By the fourth quarter of 2007-08, the RBI will run out of sterilisation instruments, the inflation rate will pick-up and the currency will appreciate," said Jha.

The bank expects the rupee to breach 40 by December 2007 and touch 39 to a dollar by the year-end. For 2008-09, the forecast for the rupee is at 37.8 to a dollar.

"The fundamentals are supportive of further rupee appreciation. The balance of payments situation is improving, the current account is stable and the capital inflows are rising," said Jha.

"The rising rupee has a limited impact on export growth as what matters is global demand. We expect consumer spending in the US and Japan to rebound in the second half of the year, which alongwith resilient retail sales growth in China would be positive for Indian exports," said the bank.