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INTEREST AND INFLATION TO IMPACT FESTIVE SALES

Date 20 Sep 2011
Written By
Rising Fuel Prices and Political Instability Drive Inflation; GDP Growth Under 8%; Consumer Sentiment Negative
The government is struggling to manage inflation, exacerbated by a significant rise in fuel prices and political instability. The GDP growth is expected to be below 8%, with inflation nearing 10%. The Reserve Bank of India has raised interest rates for the 12th time in 18 months, yet inflation persists. Rising fuel and interest rates are likely to dampen festive sales, as businesses pass costs to consumers. High property prices and interest rates deter housing loans, impacting banks' loan books. Consumer sentiment is negative, and the economic outlook remains challenging, with hopes for improvement in the coming quarters. - (AI Summary)

The Government of the day seems to be on the back foot as it has failed check inflation on a continuous basis, fuel prices have risen beyond imagination in past two years and it is not able to concentrate on reforms, given the political developments and host of corruption scandals which have weakened its functioning and decision making. GDP growth is now expected to be around 8 percent only which means it could be well below 8 percent.

Oil companies (through government’s consent) increased the fuel (petrol) price by Rs. 3.32 per liter from 16th September, second highest in recent past (a hike of Rs 5 per liter on 15th may). This time not because of global crude price but to pass on the impact of depreciating rupee resulting in higher import cost. Petrol prices have gone up by whopping 39 percent since June 2010 and there have been nine times price hikes since then. However, diesel prices have gone up by just 8.37 percent since June 2010. Dispute this hike, oil companies may further hike the prices in future.

The increase in petrol price will only add to the already high inflation of close to 10 percent, highest since last 13 months (9.78 percent to be precise). The hike in petrol prices will only fuel the inflation rate. Reserve Bank of India once again raised the interest rates, this time being 12th in a row in last 18 months even as economy slows down in order to continue with its anti inflationary stance. RBI, however fails to realize that this is just not working since last one and a half years and it needs to change the prescription. The policy lending rate called repo rate went up by 25 basis points to 8.25 percent which may prove to be a futile exercise once again.

Short term measures like improving the supply side of goods and commodities causing inflation are required alongwith long term measures which may be technological advancement to improve production and productivity, proper implementation of governmental spending, infrastructure development and other measures leading to cost cutting as supply side of goods and services. Both, increase in interest rate and petrol prices will act as a catalyst to rising inflation. It is but natural that businessmen will pass on the costs to the consumer. 

Banks shall certainly, later or sooner  pass on the policy rate hike on consumers by increasing its base / lending rates. Simply put, higher the cost of funds, higher is bound to be rate of lending to borrowers. All along, while RBI has raised the policy rates a dozen of times in last 18 months, banks have also been raising their lending rates. With festive season round the corner, this time banks may also avoid offering customary special offers. This may adversely affect the sales. High property prices and higher interest rates shall act as a deterrent to rise in housing loans. Not only this, other loans will also decline and affect loan book of banks, besides lower sales this season.


The Unusual Matrix

Growth

Real estate prices  

Inflation

Bullion rates

Interest rates              

 Recession

Sales

Car sales

Loans   

Housing loans  

Today, what is happening is that we are sacrificing at growth and yet not able to contain inflation. We also do not have a scenario of high growth – high inflation. It is sure a catch 22 situation and we need to come out of it – sooner the better.

With interest rates going up again, increase in mortgage loan rates is sure to follow. The damage from higher interest rates could be mitigated by reducing the tenure of loan which is possible either by partial pre-payment or enhancement of EMI. This applies to all housing, durable, consumer and personal loans.

Inflation and interest is going to hit the forthcoming festive demand also. This time, even discounts and freebies may not help boost the demand as inflation and rising interest rate would spoil the game and adversely affect the sales in coming navratra – diwali season. According to a recent survey by Nomura, consumer sentiment is already turning negative, as seen in the decline in growth rate of consumer durables loans deployed by banks. The reason behind this decline is seen to be inflation and growing interest rates and this downturn is likely to continue until inflation is brought down.

Here is a unique problem being faced without a probable solution in sight. For last 18 months, both inflation and interest rates are creeping up and up, unlike what used to happen earlier. Many feel that the recent rate hike was not required given the present subdued global economic environment  and slowdown in domestic economy. The question before us is are we heading for an another crisis – an unexplained one. 

While sales in some sectors may go up but it would be a challenging task – be it electronic goods, other home appliances or even jewellery. Real estate is really going to have tough times. This festive season is going to be tough one – for all. However, we should hope to have an eased out economic condition in next few quarters, more so with good mansoon and harvest this year too.

 

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