Home loan equated monthly installments are a significant drain on salaries, so it's no surprise that the Reserve Bank's policy moves are closely tracked not only by economists, but loan consumers too. When headline inflation eased to over 40-month low in April, a rate cut on June 17 - when the RBI meets to discuss policy rates - looked a certainty. However, the sharp plunge in the rupee has changed all equations and more and more analysts have discounted the possibility of a rate cut next week.
Since, the falling rupee leaves little headroom for rate cuts, high EMIs may continue to be a reality for the coming months too.
1. Weak rupee
fuels deficit: India's current account deficit (basically the
net of outflows and inflows) will go up by 0.4 per cent of GDP if the rupee
weakens by 10 per cent, according to Nomura estimates. Rising deficit puts
further pressure on the rupee and the cycle goes on. "From the RBI's
perspective, current account deficit is a concern because it has implications
for the exchange rate and thereby for inflation," governor D Subbarao said
earlier this month.
2. Weak rupee
may force RBI to hike rates: Falling currency reflects poorly on the
government's fiscal management and puts pressure on the central bank to
intervene in forex markets. "The classic response of a central bank to
weakening currency is to raise interest rates," Sonal Varma and Aman Mohunta
of Nomura said. Higher rates are aimed to reduce spending and curtail demand of
imported goods. The RBI is unlikely to hike rates to defend the rupee because
India is growing at the slowest pace in a decade. What the central bank could
do is to hold rates until inflation and CAD become manageable.
Since, the falling rupee leaves little headroom for rate cuts, high EMIs may continue to be a reality for the coming months too.
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