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Home  » Business » Teasing is over, brace for higher rates

Teasing is over, brace for higher rates

By Joydeep Ghosh
March 26, 2010 10:32 IST
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The honeymoon for home and auto buyers is over. With the Reserve Bank of India raising repo and reverse repo rates by 25 basis points last week, most expect that interest rates will now start moving up.

RBI has indicated there could be further rises in the days to come. Its governor, D Subbarao, said on Thursday that the central bank would continue its movement towards exiting its accommodative policy, implying further rises in indicative rates.

Clearly, we are moving towards a higher interest rate regime, which is, however, good news for investors in fixed deposits. A number of banks started raising their deposit rates last month.

For example, HDFC Bank increased its deposit rates up to 150 basis points across maturities. ICICI Bank did so by 25-50 basis points. So have many public sector banks, such as Bank of India and Central Bank of India.

Obviously, the focus for a lot of investors will be on the debt portfolio. Industry experts felt the second half of the year could see debt mutual funds doing much better. Though it is still not the time to go the whole hog, shorter-term debt schemes are likely to do better than medium and long-term ones.

Said A Balasubramaniam, CEO, Birla Sun Life Mutual Fund, "For the next couple of months, passive fund management will not help. Fund managers will have to react to situations quickly. Actively-managed schemes in both duration and spread management are likely to do much better." In other words, look at short-term schemes now.

Balasubramaniam said May-June would be a good time to take a look at medium- and long-term schemes again. Reason: One would be more confident about the direction interest rates would take then.

Lending rates, on the other hand, will also start going up. Teaser rates, launched by almost all banks, including State Bank of India, HDFC, Axis and others, are already being phased out.

Axis Bank exited its two-year fixed rate scheme last month, almost two months before schedule. HDFC's teaser rate closed on February 13. Many others have also gone out of the market.

For a potential home-buyer, this means that besides rising property rates, he will be burdened with higher interest rates as well. "For someone buying his first home, I will advise that timing the market is not at all important. However, one can wait till the first week of April to see where home loan rates go," said Harsh Roongta, CEO, apnapaisa.com.

However, for those planning to invest in property, things are unclear. Property experts feel it makes sense to wait for more time. Akshaya Kumar, CEO, Parklane Advisors, said: "I don't see the property market running away anywhere in the next few months, so an investor can wait before taking a call."

According to him, if the stock market were to stay strong, the property market would follow, though with a lag. However, a higher interest rate regime could be a deterrent. "One can take a call on investing once there is some clarity on interest and property rates," he added.

As far as a car loan is concerned, most feel one should defer the purchase unless it is necessary. "With cost of living rising due to higher food inflation, consumers should concentrate on savings rather than unnecessary purchases," said a financial planner.

Also, after the first round of rise in car prices in January, many auto makers like General Motors and Hyundai Motor India are expected to raise prices by 1-3 per cent from April. In addition, loans will become costlier.

Further, many people purchase cars during the end of the year, because it gives them depreciation benefits while filing tax returns. Purchasing in the initial part of the year does not make much sense from a tax perspective. One could wait for some more time for things to cool before deciding later in the year.

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Joydeep Ghosh in Mumbai
Source: source
 

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