RBI steadfast in anchoring inflationary expectations

The Reserve Bank of India’s (RBI’s) latest quarterly report on the economy articulates that over the past 15 months, it has undertaken one of the sharpest monetary tightening seen across the world. Factoring in Tuesday’s monetary measures, since March 2010, there has been a cumulative increase of 475 basis points in operational policy rates. Clearly, at this juncture, RBI remains steadfast in its single key objective of anchoring inflationary expectations. However, the 50 basis points increase does seem sharp.

While rates will obviously tread higher as a result of Tuesday’s measures, one must reiterate that the demand for home loans will continue. While there is a slowdown in the high end of the home market, the effects of which are already being seen in Mumbai, I believe the middle income borrower, who is a genuine home user, will not change his decision to buy a home due to increases in interest rates. A housing loan is a long-term loan and over the life of a floating rate loan, interest rates increase and decrease. In the past six years, we have already seen two interest rates cycles. Further, fiscal benefits reduce the effective rate of interest on a home loan.

Market reactions to the policy have not been favourable. With the Wholesale Price Index-based inflation hovering at over 9 per cent, without yet factoring in the full impact of the recent increase in diesel and LPG prices, it appears to be a long haul before inflation falls within RBI’s comfort zone.

KEKI MISTRY
Vice-Chairman & Chief Executive Officer, HDFC Limited