Inflation in India has been hovering around 5.5% to 6% mark for a couple of years and it's been giving Mr Y.V. Reddy (RBI Governor) some very sleepless nights. While we have been crowing about our amazing 9.5% GDP growth rate in recent months, the flip side has been rising inflation, which can become chronic if not attacked vigorously. Mr Reddy has been raising interest rates steadily over the last year and half, and now they have reached levels that are beginning to hurt the common man. The RBI is pursuing a medium term inflationary target of 4% to 4.5% and a sustainable GDP growth rate of 7% to 7.5%.Somehow, this reality has not registered with investors and corporates alike who still religiously believe we will continue to grow at 8.5-10% for the next few decades. Let me share a sampling of borrowing rates in India to drive home my point.
When I arrived here last year, I looked at financing options for buying a home and a car. I found that the rates were a bit rich at 8.5% for a home loan and 10.5% for a car. Since then, rates have gone up by almost 25%-30%! The cost of home loans in India has shot up from a low of 7.5% in Sep 2004 to 11.5%-12% now (on 20 year loans). Car loans now cost 15% (for 5 year loans).
Car sales are still robust, although frothy property markets like Chandigarh, Gurgaon and Pune are beginning to soften for condos under construction. Home loan defaults have risen by 1% since June of last year and are at an average of 3.5% to 4% as per a recent press brief by the Chairman of SBI (India's largest bank). If these defaults are primarily by property investors, then its a sign that RBI's efforts to flush out excessive speculation are working. However, we need to find out whether genuine home owners are hurting as well. As you many intuitively understand, it takes a lot for a home owner to risk his/her homestead by falling behind on loan payments. In fact, most home owners will cut back on a lot of discretionary spending before they default on their home loans. It would be interesting to track the default rates on car loans and credit cards as well.
The Indian stock market doesn't seem to be much worried about the impact of rising rates at this time as indices are close to all time highs. Perhaps, that's because the indices include large well capitalized companies that have access to cheaper foreign funds. The Indian stock market is therefore a poor indicator of the overall health of the Indian corporate sector, especially the SMEs, which have to borrow at high rates from domestic banks. Large healthy Indian companies have an average borrowing rate of 8%-9% via a mix of foreign and domestic borrowings. However, the cost of borrowing for small and medium sized companies is about 12%-13%, which is what domestic banks charge them now. Corporates with iffy credits borrow at rates as high as 15%. A big chunk of India Inc's overall capex comes from the SME sector which is bound to slow down at these hurdle rates. The rising rupee is not going to help either as exports are largely dominated by SMEs.
It's time to take a pause and watch leading macro indicators very closely in the Indian economy. Mine isn't flashing red as yet:The cost of bade miya's chicken rolls hasn't gone up yet, much to my relief! Mumbaikars have long held a reverence for Bade Miya's rolls that is matched by the cult following amongst New Yorkers for Mamoun's falafels in Greenwich Village.
Let's just hope that inflation begins to temper down meaningfully this summer, otherwise the impatient Mr Y.V. Reddy will inject more pain into this economy via further rate hikes.
Bearish article on real estate investing
http://www.business-standard.com/common/storypage.php?autono=282560&leftnm=5&subLeft=0&chkFlg=
Posted by: Amit Singh | May 10, 2007 at 05:22 PM