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).