Recent
announcement by RBI (Reserve Bank of India) Governor, on September 29, 2015, with
respect to interest rate cut by 50 basis points was one of the most awaited event.
Some of the reasons are, this will lower EMI (Equated Monthly Installments) of
housing loan, auto loans and help boost economic growth.
The rate cut will benefit common man, according to RBI Governor; this is due to fall in inflation (interest rate normally is lowered when there is fall in inflation). Lot was written / spoken on the same day and subsequent days in various newspapers and media, many welcomed the move. Immediately, financial institutions like HDFC, SBI and other banks reduced interest rates.
The rate cut will benefit common man, according to RBI Governor; this is due to fall in inflation (interest rate normally is lowered when there is fall in inflation). Lot was written / spoken on the same day and subsequent days in various newspapers and media, many welcomed the move. Immediately, financial institutions like HDFC, SBI and other banks reduced interest rates.
Real estate industry
believed that rate cut will help increase in sales. Industry leaders believe
that this will be boost for the economy (which was desperately requiring a
support from RBI in the form of rate cuts).
To quote from an article, appeared
in Indian Express newspaper “To quantify,
a new customer seeking a 20-year loan, amounting to Rs. 50 lakh will save close
to Rs. 2,800 in EMIs every month”.
The question is how many get
a housing loan of Rs. 50 lakhs with a salary of Rs. 25,000 to Rs. 35,000 p.m (per month). To get Rs. 50 lakhs loan one should have minimum salary of Rs. 70,000
p.m. ( approx.). Also, for a Rs. 20 lakhs loan minimum EMI will be approx.
Rs. 22,000 p.m.
Yes, the rate cuts have
arrived and gone. There are certain facts to be kept in mind; rate cuts are not
going to increase demand for house ownership. There will be a small change in EMI
(benefiting mainly new and flexible EMI owners). Further, the housing rate has
increased beyond the capacity of common man. This has been referred in many
articles.
RBI Governor spoke on August
2015 the following about real estate developers “I think we need the market to clear. With growing unsold stock, we
need to see the ways to do it. Some of it might be by making loans easier, but
we also don’t want to create a situation where prices stay high at the level
which means demand can’t pick up,” Rajan said at the SBI Conclave.”
In other words, real estate developers have to reduce the prices.
The above statement by RBI Governor
will contradict as fall in EMI is expected not to reduce real estate prices but
it will stabilize it or used as incentive to marginally increase the prices.
Here, I wish to bring to attention
the plight of women who are dependent on interest on fixed deposits left by
their spouses and also men who have retired with meager fixed deposits. This
class of people are non pensioners or pensioners with minimum pensions like
Rs. 1,000 per month or little higher. The main source of income is
interest income for household expenses. This class of people is going to be
badly affected. It is said that with lowering of interest rates inflation falls
and with a fall in inflation buying power increases.
I think people (especially economist
and learned men) commenting on rate cuts and its impact on buying power have to
rethink. They have to ask does fall in interest rate impact the following,
which are basic requirement of human being:
· Fall
in transportation price
· Fall
in medicine price
· Fall
in Doctors fees
· Fall
in electricity charges , water charges or municipal charges Or
· There
will be spike in the demand of retired (with minimum or no pensioners) buying
homes worth Rs. 35 lacs- Rs. 40 lacs ( i.e. one bedroom hall kitchen) in urban
areas / cities.
I do not think this cost
will ever come down and can be afforded by left outs (i.e. retired with minimum
pension or men working under contractual or unorganized sectors).
It is time to take stock of
reality in a distorted scenario.
Sources:
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