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High inflation, higher interest rate

FEAR FACTOR

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Joydeep GhoshTinesh Bhasin Mumbai
Last Updated : Feb 05 2013 | 3:55 AM IST
With the rising WPI making life difficult for the Centre, RBI might just be forced to hike the indicative rates. For the consumers, it means more trouble.
 
Puneet Lakhotia, 26, an employee with a multinational bank is planning to get married in the next one year. The only hitch: he cannot find a suitable house that fits his budget. In the last three months, when banks started reducing their home loan rates, he was under the impression that he would be able to purchase a flat soon.
 
However, the recent rise in the inflation numbers is again worrying him as the Reserve Bank of India(RBI) might hike the indicative rates in the upcoming credit policy. Now, he is praying that property prices come down soon.
 
Chetan Tandel has been planning to replace his father's 1992 model Maruti 800 for a better car. However, he has postponed his decision because he fears that the household budget could get hit, if he opts for a car loan.
 
Surely these are signs that the Indian consumer is not so gung-ho about the prospects of the economy.
 
Since January, what many feared 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.
 
Says 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."
 
Clearly, these are indications that consumers are going to face more trouble in the days to come. For a new home buyer like Lakhotia, it's a simple case of praying for some divine intervention. Otherwise, the finances will have to be stretched severely to purchase that "home".
 
However, if it is your first home, most financial experts would 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.
 
Says Jitendra Balakrishnan, deputy managing director, IDBI Bank, "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."
 
A word of caution though: financial planners say that to be on the safe side, one should not expose oneself to too much risk, even while taking a home loan. That is, 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.
 
This is because many home buyers have found themselves in deep trouble because of the rise in the interest rates in the last few years. Some actually saw the pressure of home loan equated monthly instalments (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.
 
Wait and watch for the next six months. 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 bound to be some pressure on property prices. Most feel that in six months, there is a strong likelihood that there would be some correction on that front. For buyers of cars through loans, the advice is 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 other words, spending decisions have to be weighed carefully, especially, because the stock markets are not giving great returns at this point in time. And rising interest rates and inflation will further eat into your salary.

 
 

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First Published: Apr 06 2008 | 12:00 AM IST

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