Get ready for tougher times

Delay big buying decisions as borrowing costs will continue to be high

 Your wait for that dream home or car seems to have got longer. Thanks to the Reserve Bank of India’s (RBI) status quo on key rates on Monday.

Many would have been waiting for the RBI governor to cut rates on Monday for a second time this year.

Any rate cut, if it had happened on Monday, would have given some respite from high interest rates. Even if the outgo of equated monthly instalments would not have fallen substantially, it would have served as a change in mood to some extent.
 

WHY THINGS LOOK DISMAL:

• Borrowing costs will remain high, as bankers are not likely to reduce rates 
• High inflation is likely to be the norm for some time more 
• Investments will continue to earn less during the short term 
• Your purchasing power is not likely to be in tandem with the rising prices

After on Monday's announcement, there isn't much to cheer. On the other hand, costs continue to be high.

According to the Directorate of Economic and Statistics Data, the Consumer Price Index in urban Maharashtra has gone up seven per cent in the past year. The food index has risen 9.5 per cent, fuel, power and lighting index has risen more than 10 per cent and clothing, bedding index by 5.8 per cent. People are paying 11 per cent more for petrol than they did a year ago. According to the RBI, the primary food articles inflation has risen from -0.7 per cent in January to a massive 10.7 per cent in May this year.

If economists are to be believed, things may remain difficult in the short term, that is, three-six months. Madhan Sabnavis, chief economist at CARE Ratings says the fundamentals domestically have not been improving, and is not likely to improve before October. “Even this improvement will only happen if we have a good monsoon this year. There are already fears the monsoon may not be good as it entered the Indian subcontinent a little late,” he adds.

All this can mean channelising more money towards non-discretionary spending. Households have been cutting costs and down trading shopping, even for essentials. Leaving lesser money for borrowing purposes.

And bankers say it is unlikely they will cut the lending rates any time soon. “I don't think banks will reduce lending rates immediately. Unless RBI cuts cash reserve ration (CRR), there is very little possibility for banks to cut rates. Banks will cut deposit rates before they cut lending rates to bring down their costs. And this may not happen anytime in the next two-three months. A cut in reverse and repo rates is only a signal for banks to cut rates, but banks cannot cut deposit rates unless inflation declines. That is why even after the RBI cut reverse repo rates by 50 basis points in the last policy, not too many banks cut deposit rates,” says R K Bansal, executive director (retail banking), IDBI Bank.

So, what is the way out for those who want to take a loan? “I suggest those looking to borrow may wait till the next policy review. But, if one does decide to borrow, opt only for a floating rate loan to get the benefit of interest rate movement,” advises D Sundararajan, CEO of Trendy Investments.

Since most of the loans offered are floating rate loans, customers will see their loan rates coming down when banks cut base rates. If you go for a loan now, you will have to pay a higher interest, which may eventually come down. On the other hand, you may have to start with a lower rate three-six months later.

As for investments, as the rates have been left unchanged, opt for short-term debt funds to take advantage of higher interest rates cycle. Mahendra Jajoo, director and CIO (fixed income) at Pramerica Mutual Fund says those who have not yet invested in short-term funds should reallocate at least 50 per cent of their debt portfolio into short-term income funds (for three to six months) and dynamic bond funds (for 12-15 months). “The rates are attractive and opportunity for capital accrual is also higher. These are good instruments to tackle it market volatility,” he says.

In case of bank fixed deposits too, one should look at ones with shorter tenure.

Vishal Kapoor, director and head of wealth management at Standard Chartered Bank says it makes sense to park your money in short-term deposits and not lock it.

But, there is one positive in on Monday's monetary policy stance. Had the benchmark rates been cut, it would have spiked the already soaring inflation.

So, in that sense there may be some respite as inflation is expected to stagnate at the current level for now and start moving down in two-three months.