Auto, housing sector to be hit most by rate hike

With the days of low interest rates that boosted demand for homes and cars behind us, real estate players and automakers fear that potential buyers would divert their rising wealth to savings instruments than spend it.

On the flip side, slumping sales could soon force housing and vehicle prices lower, but not just yet. "The rise in interest rate will put major strain on middle income buyers. They are really squeezed up as the EMIs have gone up by almost 50 per cent in last three years," said a real estate company official.

For instance, those who borrowed home loans in 2003 at an interest rate of 7 per cent are today paying over 11 per cent.

India's second largest lender ICICI Bank has already announced it would raise home loan rates by one per cent and other banks are likely to follow suit in the wake of RBI increasing its key short-term lending rate (repo) as also the percentage of mandatory bank deposits on Friday.

Real estate agents and bankers agree that potential buyers would postpone their decision to purchase a home or car after the hike in interest rates.

According to Hero Honda Chief Financial Officer Ravi Sud, hardening interest rates are going to slow down sales of two-wheelers as buying interest is getting negatively impacted owing to increasing interest rate.

"Our March sales are likely to be flat on a year on year comparison basis. Sales are being impacted primarily because of hardening interest rates, which makes monthly installments higher," he said.

Consumers who have surplus cash are also choosing to invest in various savings instruments rather then spending on purchases, he added. Bankers admit that interest rates on home and personal loans are set to shoot up further as a result of Reserve Bank's monetary policy decisions to cool inflation and temper the high demand for loans.

The central bank had made borrowing costlier, by hiking the inter-bank short-term lending rate by 0.25 per cent and the mandatory deposits banks with the RBI by 0.5 per cent.

RBI's measures are in response to inflation, which is now hovering around 6.46 per cent against this fiscal's target of 5-5.5 per cent.

In the last two years or so, banks have increased home loan rates from 6.5 per cent to 11 per cent, resulting in equated monthly installments rising by over 40 per cent.

Some economists, however, expressed doubt whether RBI's monetary measures to squeeze liquidity in the market will bring down "inflation pushed by supply-constraints" and when flow of capital through FIIs in the stock market is leading to rise in liquidity.

"RBI's measures seems to be just to balance the flow of liquidity through investment by foreign institutional investors in the stocks market, with little success to curb inflation," said a banker, adding that the Central bank was unnecessarily hurting borrowers and economic growth.

The Asian Development Bank last week forecast that India's economy would grow by a moderate 8 per cent this fiscal, as against the estimated growth rate of 9.2 per cent in 2006-07.