Indian interest rate hike unlikely to affect NRIs
dubai — The cost of borrowing for Indians will rise after the Reserve Bank of India raised benchmark interest rates by 25 basis points to 6.5 per cent.
Analysts say that the hike will not have a major affect on nonresident Indians (NRIs) in the UAE, except those who are holding floating mortgage rates back in India because most of the existing auto and personal loans are obtained at a fixed rates.
Vijay Valecha, chief market analyst at Century Financial Brokers, said NRIs can, however, benefit from a higher interest rate on fixed deposits. The hike is in line with the predictions made by analysts. Out of 53 economists polled by Bloomberg, 40 had forecast hike in rates. On Tuesday, five out of six policy members of RBI voted in favour of rate hike.
Replying to a question, Valecha said it is cheaper to get a loan in the UAE than in India despite this hike, although the US Federal Reserve is supposed to raise rates much more aggressively than the RBI. “All kinds of loans, whether it be personal, auto or mortgage, will be impacted by this hike. For people having existing loans most of the personal and auto loans are usually at fixed rates, hence the biggest impact comes to mortgage loans.”
The repo rates are also hiked to contain inflation in the country.
Given the increase in crude prices and higher inflation expectations, Valecha sees one or two more rate hikes by the RBI this year.
Surendra Hiranandani, chairman and managing director of House of Hiranandani, said inflation is expected to trend upwards and might surprise in the second half of the year owing to increase in higher government spending.
He said the hike will certainly impact credit growth and further delay the revival of real estate.
“Construction activity had started to pick up slowly post the implementation of policy reforms, but the rise will hurt consumer sentiment... interest rates and regulation will decide the long term success of the real estate sector in India.”
mumbai — The Reserve Bank of India raised interest rates for the second straight meeting on Wednesday, but retained its “neutral” stance as it aimed to contain inflation while not choking growth.
The RBI’s Monetary Policy Committee (MPC) raised the repo rate by 25 basis points to 6.50 per cent. It is the first time since October 2013 that the rate has been increased at consecutive policy meetings.
In June, the MPC increased the key rate by 25 bps. The rate action was in line with a Reuters poll, which showed 37 of 63 economists expecting a rate increase.
“The swiftness with which the central bank has responded to the jump in inflation should prevent the need for very aggressive policy changes in the future,” Capital Economics analyst Shilan Shah said in a note.
The bank’s decision to raise rates comes as global central banks, such as the US Federal Reserve, the Bank of England and the Indonesian central bank also adopt a tightening path.
The Fed, which is expected to keep rates on hold at a two-day meeting that ends later on Wednesday, has already raised rates twice this year, while the Bank of England is poised to raise rates at a meeting on Thursday.
Indonesia’s central bank has been the most aggressive in Asia this year, hiking its benchmark rate 100 basis points between mid-May and the end of June.
In Indonesia’s case, the main reason to hike has been its fragile
We’ve already had a few months of turbulence behind us and it looks like that this is likely to continue Urjit Patel, RBI governor
currency. For the RBI, inflation is the central concern.
While the RBI on Wednesday marginally trimmed its inflation projections for the current quarter, the central bank said its inflation projections beyond that remain “broadly unchanged”.
India’s annual consumer inflation hit five per cent in June, the eighth straight month in which it topped the RBI’s medium-term four per cent target.
Global crude oil prices have surged nearly 20 per cent this year and crossed $80 a barrel in May, their highest since 2014.
This has driven the prices of fuel — the biggest item on India’s import bill — to record highs at a time the rupee is testing new life lows, raising the threat of imported inflation.
Indian monsoons, one of the largest determinants of the inflation path, have been erratic and patchy in several regions this year, muddying the outlook for winterharvested crops and adding to inflationary pressures.
The MPC warned that “rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity.”
RBI governor Urjit Patel said: “We’ve already had a few months of turbulence behind us and it looks like this is likely to continue. For how long, I don’t know.”
The governor said trade skirmishes have “evolved into tariff wars and now we’re possibly at the beginning of currency wars. Given this, we have to ensure that we run a tight ship on the risks that we control to maximise the chances of ensuring macro-economic stability and continuing with the growth profile of seven to 7.5 per cent.”
Five of the six members on the rate panel voted for the rate increase.