Shallow Pockets

If you have not noticed, Reserve Bank of India (RBI) has raised the interest rates again by 25 basis points. Well, for the start I was confused whether this concerns to Finance or Economy! But certainly this has to hurt more to the pockets of salaried class than the country as on whole-scale. And we got proof of it yesterday (Aug 1, 2006). HDFC Bank and PNB raised interest rates for home loans. Now floating rate is 9.50% and fixed rate is 11.00%. For better understanding here is table with courtesy of The Indian Express, dated Aug 2, 2006.

For 20-year Rs. 10 lakh loan
Old EMI	New EMI	Monthly rise	New rate
FLOATING
8997.26	9321.31	324.05	9.50%
FIXED
9983.80	10321.88	338.08	11.00%
For 15-year Rs. 15 lakh loan
FLOATING
15214.00	15664.00	450.00	9.50%
FIXED
16581.00	17049.00	468.00	11.00%

Times have changed drastically, you remember once the Floating rate was 7.00% and fixed rate was 8.00%. What does it imply? If you have taken loan with 7.00% floating rate it now works with 9.50%. So your EMI would now have increased by about Rs.2000-3000 or if you want to keep the EMI constant, the repayment period would have increased by about 4-6 years on a loan of Rs.15 lakh. Now you can tell how much it would have hurt to a normal salaried employee. And this is not enough the prices of fuel have soared by about Rs.15. The prices of essential commodities have gone up taking inflation to 5.5%. Added to that, the real estate prices are soaring without any prevailing sense. It would be stupid enough to buy a house at this point, but tt is the height of absurdity to buy a house on home-loan at this stage.

On the other hand the interest rates of Fixed Deposits are about 8.00% for 1-year onwards. The signal is clear from the RBI. It wants people to stop borrowing money from the banks and instead wants them to save money in FD’s. It is a signal to dampen the spending of the consumeristic market. If this signal from the RBI is not heeded and the borrowings keep going higher then overheating of economy is guaranteed, that would spell trouble for Indian Economy and in turn to normal person’s pocket.

So for the time being sensible thing would be to retain money as much as you can, no matter how deep your pocket is! Obviously, this condition is not eternal, it will change back, but we have to give some time for them to change. So don’t venture into buying houses now, just sit on the wall for the time being!