Indian interest rate hike unlikely to affect expats

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The cost of borrowing for Indians will rise after the Reserve Bank of India raised benchmark interest rates by 25 basis points to 6.5 per cent.

Analysts say that the hike will not have a major affect on non-resident Indians (NRIs) in the UAE, except those who are holding floating mortgage rates back in India because most of the existing auto and personal loans are obtained at a fixed rates.

Vijay Valecha, chief market analyst at Century Financial Brokers, said NRIs can, however, benefit from a higher interest rate on fixed deposits. The hike is in line with the predictions made by analysts. Out of 53 economists polled by Bloomberg, 40 had forecast hike in rates. On Tuesday, five out of six policy members of RBI voted in favour of rate hike.

Replying to a question, Valecha said it is cheaper to get a loan in the UAE than in India despite this hike, although the US Federal Reserve is supposed to raise rates much more aggressively than the RBI. "All kinds of loans, whether it be personal, auto or mortgage, will be impacted by this hike. For people having existing loans most of the personal and auto loans are usually at fixed rates, hence the biggest impact comes to mortgage loans."

The repo rates are also hiked to contain inflation in the country.

Given the increase in crude prices and higher inflation expectations, Valecha sees one or two more rate hikes by the RBI this year.

Surendra Hiranandani, chairman and managing director of House of Hiranandani, said inflation is expected to trend upwards and might surprise in the second half of the year owing to increase in higher government spending.

He said the hike will certainly impact credit growth and further delay the revival of real estate.

"Construction activity had started to pick up slowly post the implementation of policy reforms, but the rise will hurt consumer sentiment... interest rates and regulation will decide the long term success of the real estate sector in India."

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