Home, car EMIs set to get higher

With inflation remaining at double-digit levels for six weeks running, the RBI decided on Tuesday to further tighten its monetary policy. The measures will squeeze liquidity and push interest rates upwards-- for you it means EMIs on loans, whether for housing, car or other purposes, are likely to get still higher. The move is also likely to hit demand in the economy, which could dampen the growth momentum.
The central bank has hiked the rate at which it lends to banks--the repo rate --by half a percentage point and the proportion of deposits the banks have to set aside in cash-- the cash reserve ratio (CRR)-- by 0.25 percentage points.
A half percentage point hike in housing, car and personal loan interest rates seems on the cards. This would be the third time in calendar 2008 that rates have been moved upwards and the second time in the current month. Earlier this month, banks had increased lending rates by 0.5 to 0.75 percentage points.
Since the beginning of 2008, interest rates on home loans have already gone up by around one percentage point. Include the rise in the interest rate expected due to Tuesday's measure and the total increase will be to the tune of 1.5 percentage points. On a 20-year loan of Rs 50 lakh that translates into an increase in EMI of over Rs 5,250.
In fact, the interest rate on home loan has gone up by almost 75% from 7% in 2004 to 12.5% at present. This sharp hike in interest rates by 5.5% has led to increase in the EMI by around 50% over these last four years, causing a huge burden for the salaried middle class.
Reviewing the credit policy on Tuesday, RBI expressed the hope that these measures, along with those already taken, would help bring inflation down to "close to 7%" by the end of the financial year in March. However, back-of-theenvelop calculations show that if the wholesale price index remains at its current level till the end of 2008, it would still end the year with an inflation rate of just over 10%.
RBI governor Y V Reddy said controlling inflation was the key objective and that the central bank was more concerned about the poor, who are paying more to purchase food items like rice and pulses, than those who might be forced to pay more to borrow to buy a house or a car. Reddy conceded that growth was likely to be affected and projected an 8% figure for the year, down from the earlier projection of 8-8.5%. BANKS MAY HIKE INTEREST RATES RBI targets 7%