On Wednesday, markets across the globe turned glum anticipating another rate hike in India after China raised the reserve requirements for banks on Tuesday. The expectation is almost certain to be fulfilled by the Reserve Bank of India (RBI) on Thursday. RBI sees a sure problem of high and persistent inflation but the report on growth blues is not so clear. The wholesale price index for May, for instance, has accelerated to 9.1% from 8.66% in April. While the growth rate of GDP in the last quarter of 2010-11 has dipped to 7.8%, corporates are still willing to buy the India story. On Wednesday, the first figures of advance tax showed a spike of 14% for the Mumbai region. So, the conclusion to be made from the Reuters poll of top Asian companies is that sentiments have dipped but optimism is far from being banished. More than the rate hike that the markets have factored in, RBI?s stance on whether it will make a pause or keep up a hawkish vigil to suppress inflation is what the financial sector will want to read. This week, the bank has released its latest household inflation expectation survey that anticipates a 120 basis points rise in inflation trends over next year, from the current perceived level of 11.5%, indicating the need for more vigil. But that picture needs to be moderated with our story today on how the rates are now crimping key sectors like housing.
At the household level, the steep rate hike is pinching existing borrowers of home loans, where the borrower is locked into long-term contracts. Customers are reworking the EMIs either by increasing the amount or by doing part-payment to reduce the tenor of the loan, as increasing the tenor means paying more in the long run. Worse, with many long-term savings instruments like public provident fund and post office deposits now giving negative returns and bank deposits slightly above inflation, the household sector will now look for new incentives to save and contribute to the growth of the economy. In a way, the combination of the need to fight inflation by sacrificing growth reads rather too much like the script for most of 2008. The end of the tunnel was the global meltdown that the Indian economy took two years to mend. While the current gloomy mood in most shores does not presage such a drastic impact despite the almost equally devastating QE2 and QE3, both RBI and the finance ministry need to ensure we do not create our own hubris.
